How Information Technology is Reshaping Investing
An analysis of the pre vs. post-Internet stock market makes it clear it grew rapidly in the Internet Age. If we graph the high points of the Dow Jones since the 1950s, we’ll see that things were largely stable until the 80s. After this, the market took off right around the rise of large-scale network connectivity.
The trend has continued every decade since until the present time. Experts say that this is not a coincidence. The Internet Age has reshaped the trading landscape and all players have better access to information than ever before allowing them to make smarter decisions.
The infographic below, created by the New Jersey Institute of Technology’s Online MBA program, takes a closer look.
Market Growth since Electronic Trading
The advancement accelerated even more since the introduction of electronic trading in 1992. Uncertainty about the platform soon turned into celebration as the market grew at a rapid pace. In fact, the Dow Jones Industrial Average or DJIA doubled within 5 years from 5,117.12 in 1995 to 10,786.85 in the year 2000. It gained a further 67% by 2014 with 17,823.07 despite the crippling recession just a few years prior.
Building a Portfolio: The Global Financial Market
The changes aren’t limited to the US, of course. The same phenomenon occurred throughout the globe as all the exchanges eventually upgraded their systems. There are 109 of them in total according to the list of the World federation of Exchanges: 23 in the Americas, 57 in the Europe-Middle East, and 29 in the Asia pacific region.
Some of them get more activity than others. The New York Stock Exchange and the NASDAQ are top exchanges in the United States. Listed firms come and go with 1996 seeing the highest number in history at 7,322. This has been trimmed down to 3,691 by 2015.
Available Financial Information for Investors
The Securities and Exchange Commission or SEC has created a free public database containing the financial information of publicly listed companies. They called this the Electronic Data Gathering, Analysis and Retrieval system or EDGAR. It is a massive archive containing over 20 million filings.
There is a wealth of information available to traders including registration details, prospectuses, periodic reports, including Forms 10-K and 10-Q, as well as recent corporate events reported on Form 8K. The best part about this database is that it is always updated with the latest info about 20 minutes after markets open for trading.
Placing the Trade
Anyone who has seen news footages of the trading floor will know that trading floors are busy places. In 2015, the NASDAQ processed between one to two billion trades on a daily basis while the NYSE managed over 3 billion. About 80% of these were conducted online. This isn’t surprising since the majority does prefer to get their financial info using online instead of offline research.
Improvements in mobile technologies are making is possible for traders to use their handsets. This makes it more convenient for them to make investments wherever they might be. Right now, roughly one-third of all players use their smartphones for this purpose. Half of them open their trading app three times a week and plan to increase their mobile usage for investing.
One of the reasons for the high volumes is automation. It’s not people who are creating orders but machines in many cases. These are called automated trading systems or ATS, which became prevalent with the online shift. Algorithms are in-charge of decision making with everything running automatically.
While ATS enhances productivity, it also comes with its own risks. For instance, a Goldman Sachs employee was charged in 2009 with stealing the company’s high frequency trading or HTS software code. HTS uses powerful computers to conduct a massive amount of orders at a rapid rate resulting in greater profits. The case exposed loopholes in the law regarding economic espionage causing legislators to make amendments.
Glitches in the last few years exposed more vulnerabilities. Examples include the suspension of trading due to the September 11 attacks and Hurricane Sandy. In July 2015, a configuration issue caused the NYSE to halt its operations for almost 4 hours. Knight Capital’s 2012 fiasco is also memorable. The company began to use a new computer program to sync trades and ended up losing $45 per minute and $440M before it was shut down.
Potential for Cyber Attacks
Finally, there are the threats from outside including cyber attacks, which could wipe out funds in a snap. It is estimated that a major US bank suffers from an attack every half a minute of each day keeping their IT departments busy. These persistent hackers have been able to steal up to $1 billion from financial institutions all over the world over a two-year period. The threat is real and companies need to constantly enhance their security measures to repel these attackers.
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