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Technology in Stock Markets: Is Human Brain Replaceable?

18 Dec 2019

Technology is omnipresent and affecting our lives as we eat, sleep, spend, communicate, travel and socialize. It has also made an entry into the domain of investment advice where it helps in eradicating manual intervention.

Planning a person’s finances and his investment strategy requires analysis and countering of a lot of factors such as the person’s net worth, his disposable income, his liabilities, his risk appetite etc. which are the tasks performed by a financial planner. However, these factors are completely mathematic. Hence, enters - the concept of Robo-Advisors.

What Robo-Advisors Do?

Robo-advisors are not necessarily walking and talking tangible robots, but are programs developed for automation of a specific task. Today, robo-advisors decide which funds to invest in by using algorithmic simulations. Robo-advisors are also being used to conduct necessary risk assessment and analysis of a person’s financial status.

These bots also help in to choosing stocks based on their trends on a daily, weekly, monthly or yearly basis as per the investor requirements. This is only possible by machines that can process large data faster than humans. There are apps customized for investors that transmit information even when the investor is on the road traveling.

Stock Markets And Technology

Trading stocks have become sophisticated and very easy now. The Securities and Exchange Board of India (SEBI) allows investors to have unlimited access to the company’s information relevant to its stock prices online. That includes earning reports, financial statements, company loans, expansion information, any decisions made in the company’s General Meetings that might affect the investor sentiments. With the company's information and any media news are accessible in real-time and so there is no time wastage in any investor decision making that might cause a price difference in the market.

In Electronic trading the computer records all stock trading transactions dynamically which means for the same company stocks if traders are accessing and trading at the same time in different parts of the country, it is updated instantly and that changes the demand-supply dynamics of these stocks which will have an impact on their prices in the stock exchange.

The use of technology has largely helped in frequency trading and leveraging in the stock market. Investors trade in stocks on the same day (Intraday trading). This practice may sometimes occur within a few minutes that has a great impact when the institutional investors do so. Their bulk trading practices executed within minutes causes a frenzy among retail traders who presume and set a trend for that company stock trade. The result may be beneficial (price rise) or reverse (price falling) to the company share price. This was not possible in manual trading.

The Clouds of Doubts

There is uncertainty in whether the avid use of technology is even worth it. There is an element of doubt as in some cases technology does help processing information faster but humans are still smarter. While the open outcry method is still prevalent in certain exchanges most of the trading is done electronically.

However, the use of technology in stock trading has its share of glitches and problems too. Leveraging and hedging in stock trades have become common with online stock trading. Most institutional investors like companies that deal with pension funds, hedge funds, mutual funds transact in the stock market that affects the sudden purchase or sale of stocks due to the restriction of trade execution within a certain date and time. This can be done intentionally or sometimes it occurs due to technical glitches that kick in the computing world causing bulk trades. This creates a false confusion among retail investors who panic and become sensitive to bulk buying and selling of a company's stock.

Technology for Retail Investors

Technology helps retail long term investors in many ways. Earlier without technology, there was a huge time lag from a press release of a company that would lead to a higher or lower stock transaction when the news hit the market in 2 days after such announcement circulated through television or print media.

Currently, with online news media and various applications on mobile devices, investors have instantaneous access to company information. As a result of such corporate news, the retail investors can make a selective and effective decision on transacting on those stocks.

The information flow is not restricted to mere dissemination of news but stretches further to an analysis of historical data, dynamic market trends that help institutional and retail investors to make a conscious decision on their investments.

Various apps allow investors to enter their investment data and self calculates their future returns for a certain time, analyze and predict the future net worth for long term investments and also caution investors on a certain trade based on market trends.

When there was only manual interaction in the stock market, investors were restricted to other humans for the execution of their trades, bias for bulk trading with better brokerage rates, less priority given to retail investors’ small trades with higher brokerage rates charged to them. With the advent of technology and state of the art apps in practice, brokerage charges are discounted and executed based on unit trade which is universally applicable to all kinds of traders.  

Is Technology the Ultimate Solution?

Digital manipulation is a dark side of technology where a false rumor can drastically influence a stock price as any relevant information can sensitize investor psychology easily. Currently, over 62% of brokers and other retail investors believe that social media affects trading sentiments.

Technology is still not useful to determine the “next best trade” sector of stock to invest in. If analyzing and decision making is done by machines, humans will be worthless and incompetent.

However, analyzing the markets and distinguishing between the rumor and facts intelligently still needs human intervention as many market dynamics, geopolitical circumstances and human psychology needs to be analyzed before reaching the right conclusion. This cannot be replaced by any technology whatsoever.

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As On 30th April, 2020
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