As financial technology companies expand their trading services to retail investors, experts are unsettled over what the democratization of these technologies means for the average investor.
Financial technology firms, collectively known as “fintech,” are swiftly bridging the technology gap between retail traders and their institutional counterparts. They are developing popular alternatives, such as financial data analytics and mobile-centric trading platforms, in a wealth-management landscape traditionally dominated by big Wall Street firms.
“Giving retail traders some sort of quantitative systematic approach to make investments can reduce the flaws in their thinking,” said Benoit Brookens III, founder of Accrue Inc., a provider of quantitative trading analytics that until recently catered to financial institutions.
The Manhattan-based firm is in the final stage of a move into the retail sphere, Brookens reported, with “a pending acquisition of a leading algorithmic-trading platform for both retail and professional investors.” The acquisition will add more than 10,000 retail investors to the company’s client base, Brookens said in a phone interview.
Brookens sees the trend as “a rising tide that will benefit everyone,” he said. As retail investors become equipped with more rational portfolio construction, rather than relying solely on free information, professional traders will also prosper from the added liquidity, thanks to greater retail participation.
The optimism that retail investors will prosper from so-called fintech is not universal in the trading world. Robert Martorana, a portfolio manager at Right Blend Investing, warned that the wave of retail-friendly trading tools may create in individual users a “false confidence in the system.”
“Individual investors are often duped by the lure of quantitative analysis, which preys on their intellectual pride,” Martorana said.
He said that, although such institutional investors as investment banks and hedge funds are susceptible to such risk, there’s usually an “adult in the room” who can limit the damage through risk-control processes like stress-testing portfolios.
What set apart institutional investors from their retail counterparts, Martorana said, are disciplined temperaments and quantitative skills like coding algorithms to identify trading opportunities — qualities that technology alone cannot compensate for.
Arguing against that view, Rick Lane, CEO of trading platform provider Trading Technologies Inc., said: “Much like an amateur driver might be hesitant to drive an F1 race car, we don’t see retail traders being too cavalier with this technology as … a major concern.”
Lane said his company’s move to the retail sphere did not stem from a conscious decision; rather, her said, it is “a downstream effect of technology.”
Making only a slight modification to its original product, which was geared to sophisticated investors, the Chicago-based software company has captured a growing number of “high-end retail investors” — people who want to learn the nuances of the firm’s Web-based trading platform. “There is already a wide range of resources and levels of sophistication within the retail community,” he said. “We are on our day-zero level to moving down the road of serving more retail users.”
Lane, in a telephone interview, said that the “dramatically falling” cost of financial technologies is why fintech firms are able to give retail traders tools that “two years ago or even a year ago they never would have access to.”
By virtue of the declining cost of technology, which institutional investors are already enjoying, a fintech stock brokerage tailors its commission-free trading platform to young, first-time investors in the retail community.
With the stated mission to “democratize access to the financial markets,” the Palo Alto, Calif.–based Robinhood Markets Inc. has saved users millions of dollars’ worth of commissions since its launch in March, according to Jack Randall, the company’s communications director.
“We do believe that more participation in the market leads to a healthier system,” Randall said.
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