The Current State of Financial Markets
What does the current playing field look like?
Currently, only large players in the financial market have the resources to deploy and trade with algorithms or using smart trading tools. In recent years the volume transacted with algorithms has increased to such an extent that a majority of orders in the financial markets are executed automatically by computers. For instance, a 2019 study showed 92% of Forex trades were made by algorithms and not manually by humans (Kissell, 2020).
However many people are still trading manually. These are often retail investors or small players who are looking to grow their money. Over the last 10 years, interest rates have essentially dropped to 0%, coupled with inflation, most people with savings accounts are effectively losing money. This has led many to look for alternative ways to beat inflation, most commonly by trying to participate in the financial markets. This, along with the rise of platforms like eToro and RobinHood has led to 25% of the stock market now being owned by retail investors (Winck, 2020).
Retail investors typically do not have access to the advanced technologies the big players are using to manage their investments and therefore have to resort to manual trading. These investors do not have the time and the capacity to manage their investments actively and often are not allowed to invest their capital in algorithmic trading firms as they do not meet the minimum amount of capital required to participate.
Moreover, the big players are quickly consolidating their power. As more and more assets are managed by these quantitative trading firms, the market becomes highly centralised and is dominated by whales. Smaller players, often individuals and small firms have an incredibly high barrier to entry and have serious difficulty in attracting capital from other investors and therefore they struggle to grow as much as they could. In order to attract customers these smaller firms would have to report on their performance, but this introduces an inherent conflict of interest as quants have an incentive to report too optimistically.
These issues will continue to widen the already huge chasm between the big algorithmic trading firms and the smaller players. The rapid growth and adoption of expensive cutting-edge technology in financial markets will only benefit the wealthy few.
Trading cryptos is hard and with far greater risk than other markets. Crypto trading is 24/7, time-consuming and requires advanced tech and financial know-how. Even though most of the cryptos investors struggle to follow the crypto markets and get profits out of it, the majority of it does not want to lose this opportunity due to the high expectations and possible future outcomes. Most of the current investment vehicles are too prohibitive for the average retailers, and most of them rely on daily news, family or friends suggestions or other kind of informative tools such as Trading View for the most skilled. All in all, emotions and FOMO are the main leading indicator in this kind of market, which is naturally linked to high volatility and fast innovation.
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