How Tech is Disrupting the Stock Market

A few decades ago, buying and selling shares in the Indian stock market was all about hand signals and strong lungs. Surprised, eh? Indeed, it was. A thumbs-up signal meant the person had 50 shares to trade, the palm facing outward meant he was a seller, and palm inward was the sign of a buyer. Flashing a victory sign in a particular manner in the trading ring meant he had 20 or 200 shares to trade. The trader had to shout throughout the trading session to attract the attention of other traders and, of course, had to be physically present in the trading ring of BSE, Asia’s oldest stock exchange.

Those days have become the subject of coffee table books. Today, Indian capital markets are counted among the most advanced and secure in terms of technology. Let’s take an example. The Indian stock market is fast moving towards a T+1 settlement cycle—if you buy shares today, the securities will be credited in your demat account the next day. And if you have sold shares then the money would be credited in just a day’s time. So what? Well, digest this: this is a technological achievement that the more advanced markets are yet to achieve—the US currently follows the T+2 settlement cycle.

While India’s capital markets have seen a fair share of innovation and technology-driven initiatives, the future has a lot in store that will not only make trading easier but also empower investors with more information and domain knowledge while making markets more secure.

IIFL Securities’ Chief Digital Officer Nandkishore Purohit believes that some of the key technology-driven themes that would influence trading behaviour in the coming years would include instant account opening, rise of niche trading platforms, hyper personalised nudging, instant settlements, and real-time resolution of client queries.

Indeed, instant account opening has made investor onboarding even in the hinterlands a completely digital and quick process. Nothing corroborates it more than the entry of a record number of new investors in the recent past—nearly 16 million in the January-November 2021 period.

Market participants believe that the coming years could see Indian investors benefiting from a long list of innovations that could even make voice commands a reality in the stock market arena. Further, algos combined with the power of bots could see both trading and advisory spaces being taken over by machines with very little human touch. Not that it is not already happening, but experts believe the coming years would only see such tech-driven tools further cementing their place.

Simply put, algos are software codes that execute trades based on pre-determined parameters, without any human element. Robo-advisory refers to AI-powered investment advice based on inputs by the investor—without any human touch. Then there is the heightened interest in tools like AI, ML, natural language processing, gamification and autonomous finance.

Say It; I Can Predict It

“The Gen Z and millennials are already at ease using gadgets like Alexa, Google Home or mobile voice assistants,” says Subhash Kelkar, Chief Technology & Digital Officer at ICICI Securities. “If technology and regulatory advancements move in tandem, the coming years could see trade orders being given by way of voice commands as biometrics in 2fa (two factor authentication). AI algorithms and machine learning will help computers action the real-world data by inputs through social media feeds, photos and videos, text and voice,” he explains.

Incidentally, capital markets regulator Securities and Exchange Board of India (SEBI) has laid down certain checks that are required for any order to be processed and, hence, voice commands are not a reality currently. Experts, however, believe given the rapid pace at which technology is entering one’s life and homes, voice commands would be a reality soon. “Some of the macro themes that would drive the Indian stock markets in the coming years would be algo trading and strategies, robo-advisory, voice technology, natural language processing, generation (NLG), understanding (NLU) and interpretation (NLI), and use of low code/no code,” says Kelkar. Interestingly, market experts say that even if someone does not want to use voice commands, AI/ML tools will be able to predict or pre-empt the order after analysing queries or chat histories of the individual.

A December 2021 report by McKinsey Analytics titled ‘The state of AI in 2021’ highlighted the fact that India leads other economies in terms of AI adoption. The same month, Deloitte, in its report ‘State of AI in India’, said that “start-ups are in a position to use AI for high-impact areas, such as building customer relationship, creating new products and services, and enabling new business models... from inception”.

“Fintech is a fast-growing industry and is constantly evolving, but the next 10 years will be the most exciting years and will witness majority of the innovations. The first trend will be ‘Autonomous Finance’, which will impact how users make decisions about money,” says Smriti Tomar, Co-founder, Stack, a personal finance app for millennials.

Human, Anyone?

While a beginning has already been made in terms of trading and advisory being handled by a combination of a software and bot, the coming years could see the human element go down further. “It is already happening in some of the bigger markets, led by the US,” says Kelkar. “Most trades are through algos. While algos take out human emotions and bring discipline in trading, half-baked algos can run into errors... So, while algos are fast gaining popularity... there will be a space for traditional advisors who could build the back-end on technology and front-end will be human—sort of a hybrid model.”

Bigger markets may be seeing a larger share by algos, but India is no more in its infancy when it comes to such trades. Data from stock exchanges clearly show that nearly 50 per cent of the trades are through algos currently. Interestingly, algos, which were considered to be the domain of big institutional investors, have already marked their entry in the retail space. It did not come as a surprise to many when recently SEBI issued a consultation paper, proposing ways to rein in third-party algos that are being widely used by the retail investor community.

While algos are removing the human element from trading, robo-advisory is doing the same in the investment advisory space. An individual has to just answer a few queries related to her investment horizon and risk appetite, among other things, and the AI picks up the best investment instrument in a matter of seconds. Experts believe the coming years will see a combination of algos and robo-advisory reduce the human quotient and while a hybrid model could be the dominant force, the underlying element will be mostly powered by AI/ML.

“Algo based trading or robo-advisory based on superior algorithms have much better chances of success as they are less prone to error. Hence, there is going to be a much bigger adoption of these services among the masses where cost of investment is a big factor,” says Tomar. There will be a role of humans as well, but it will be limited to the communication part and the systems will predominantly become an interoperable autonomous vehicle, just like Tesla, she adds. In a similar context, Purohit of IIFL Securities believes that the human element cannot be ignored but also adds that “with the rise of AI/ML techniques, we strongly believe contextual and hyper personal nudges will drive user behaviour to more informed decisions”.

Apps+

In the capital markets, apps have become the most popular way to trade among the new breed of investors; the coming years could see apps with a host of features built in. “We may see increased engagement through gamification, interactions with social media influencers, and individuals sharing ideas and trades with friends, contacts and customer communities,” says Kelkar.

A large section of market participants believes that product innovation in the coming years could see investing through apps becoming a social experience wherein one could see in their feed their friends and family or anyone they choose and also their posts on stocks—maybe even what they buy or sell if they have made it public. However, Zerodha CEO Nithin Kamath has a different view, though he believes that innovation will still happen. He feels that while trading platforms have simplified in the past 5-10 years, there has hardly been any “spectacular innovation” apart from the fact that business has moved to mobile phones. “I fail to see what further innovation can be done. While decision-making tools have democratised, the actual art of trading has remained the same. Going ahead, one could see voice recognition, though there are regulatory challenges. Also, one could see some players making investing a social experience within the apps, though this has been tried in the US but without much success,” he says.

Interestingly, it is widely believed that the coming years would see broking firms focus on tech-driven innovations that would help investors take informed decisions and make money. Nudge features, for instance, caution or alert investors if they are mulling a sell order and if holding back for a few days could net them a higher profit. “Features of the future should be aimed at reducing the fundamental mistakes of investors as the chances of greater participation is only if investors make money,” says Kamath.

Challenges & Risks

While market participants are unanimous in their view that the coming years would see many tech-driven innovations in the Indian capital markets, they also say that the journey is fraught with challenges and risks. The biggest challenge, Kamath says, is scaleability while ensuring that tools powered by technology help investors make money. “Technology will increase participation but we need to scale so that the platforms do not go down when there are more users. The capital market is very centralised with huge dependence on just two-three categories of institutions (exchanges, clearing corporations, depositories),” he says. The other big challenge, he adds, is to keep clients active and help them make money so the industry grows by word-of-mouth publicity.

Stack’s Tomar feels that over-dependence on technology could increase the risk of data theft and investors need to be cautious while using different platforms. This is already evident from the lending industry, which got exposed to major threats in the past decade, she says.

There are enough instances in the capital market space as well with broking firms seeing downtime due to technical issues; even stock exchanges have witnessed glitches that have brought trading to a halt. That doesn’t mean the capital markets will not focus on technology and innovation. “There are risks when you depend on humans, there are risks when you depend on technology. If we hadn’t taken risks, we wouldn’t have computers today or online trading or even exchanges. Tech is the future... That said, we are investing heavily on improving information security,” says Purohit.

@ashishrukhaiyar