Technological Innovation has always affected trading ....

Old days of trading: highly specialized humans

Modern Day Trading

Autonomous Algorithms run the show

Modern Day Trading

Trading floors are more suited for parties and journalists

Modern Day Trading

And the former heart of Wall Street is now in a faceless & glamourless suburb of Mawah, NJ

Why?

• Many trading strategies are more-or-less mechanical/probabilistic
• computers are
  • faster,
  • cheaper, and
  • more reliable 
• Computer algos allow much wider scope

Source: Bloomberg News, Feb 20, 2015

Note: The biggest disruptors (the HFTs) came from the outside of the traditional system (kinda).

The HR Component

• Old skill-set of an equity trader
  • good and fast with numbers
  • brash
  • strong vocab in profanities
  • whatever this koala has...
• New skill set
  • programming
  • stats/data
  • econometrics
  • ....

The result?

Markets get better: the post earnings announcement drift had been a long-standing puzzle in finance. ... It's gone.

And what's the result?

Source: Martineau (UofT) (WP2017)

The world of Finance as we know it is over

in a nutshell: why people choose to work in finance

Source: Philippon (AER 2015) "Has the U.S. Finance Industry Become Less Efficient?"

The Growth of Finance as % of GDP

Source: Philippon (AER 2015) "Has the U.S. Finance Industry Become Less Efficient?"

... and unit costs are flat!

Source: Philippon (AER 2015) "Has the U.S. Finance Industry Become Less Efficient?"

Ratio of the income of financial intermediaries to the quantity of intermediated assets

Workers in the Finance Industry benefit greatly from growth of finance

• Philippon and Reshef (QJE 2012):
  • 1980: wage financial services=wage other industries​
  • 2006: financial services=170% x other
• ​​​Goldin & Katz (AER 2008)
  • ​​1969-74: 6% of Harvard grads went to Fin Industry
  • ​2006: 28%
• Oyer (JF 2008):
  • ​​wages Stanford GSB grads in finance industry
    • ​​300% of wages in non-finance

What drives high wages?

Deregulation or complementarity to IT?

Source: Philippon & Reshef (JEP 2013)

What explains high wages?

• High quality?
  • ​​​Bai, Philippon, Savov (JFE 2013): No, markets haven't become any better/more informative.
• ​​​​Better allocative efficiency?
  • ​​​Aguiar and Bils (AER 2015): no improvement in risk sharing.
  • No evidence that allocative efficiency has improved (typically measured by "total factor productivity" (TFP)).
• There is a dispute whether growth in finance has actually brought benefit to society ...

And then there's this:

which led to ...

Why disruption from outside?

• Financial Industry is self-contained
  • for many years, hired a "certain" type of person
  • "fixed" set of tech vendors
  • access to financial infrastructure essential
    • outside disruption difficult
• Technological advances have the capacity to break into the industry

Example: One of the first segments that were disrupted from the outside: equity trading

Why disruption from outside?

Main Structural Change

Main Structural Change

Main Structural Change

Fastest Computer in 1985!

Main Structural Change

Moore's Law

"the number of transistors per square inch on integrated circuits had doubled every year since their invention."

Moore's Law: the future

Source: "Unlocking the human opportunity:  Future-proof skills to move financial services forward"; PwC report for the Toronto Financial Services Alliance, April 2018

What is FinTech?

Key features

• focus on positive customer experience
• Willingness to apply technology in novel ways.

Approach: Propositions that are

• simpler, seamless
• more convenient,
• more transparent and
• more readily personalized.

based on EY 2017 FinTech report

Consequence of FinTech

Impact on incumbents:  struggle to deliver the seamless and personalized user experience.

Consequence: ripple effect 

• consumers expect convenience for all financial products and from all service providers
  • retail banking,
  • wealth management or
  • insurance.

based on EY 2017 FinTech report

Problem for incumbents

• FIs focus on their needs and wants
• => are not customer-centric

5 years ago many haven't heard of it!

Source: EY FinTech Adoption Index 2017 

18%

Obstacles

Source: Philippon (2017)

• non-integrated IT systems

Things are changing ...

• non-integrated IT systems

Things are changing ...

• non-integrated IT systems

Things are changing ...

• non-integrated IT systems

Clayton Christensen: customers don’t buy products; instead, they hire a solution to help them complete a specific job at a specific time.

https://youtu.be/sfGtw2C95Ms

Payments

Payments

Importance of Real-Time Payments

https://www.brookings.edu/opinions/real-time-payments-can-help-combat-inequality/

Payments

Lending and Borrowing

price for loan

effort required to get loan

Example: Upstart

Tools? 

Example: Lending Club

Future: Scalability

Source: ​Jagtiani & Lemieux, 2017, Philly Fed Working Paper 17-17

Big Data, Machine Learning, AI

Big Data, Machine Learning, AI

• Data is valuable
• Alternative data:
  • Better Governance Mechanism (Zhu (2019))
  • Too much of "low quality" info may discourage long-term info acquisition (Dugast and Foucault (2018))
• Concerns?
  • Privacy? 
  • Discrimination?
  • Opacity of algos!

Big Data, Machine Learning, AI

Big Data, Machine Learning, AI

• MIND: Horizons ACTIVE A.I. GLOBAL EQUITY ETF
• "The ETF allocates its equity index exposure using a proprietary artificial intelligence selection process that extracts patterns from analyzing data"

WealthTech

1. availability of investment products
2. fee transparency
3. regulatory changes
4. mobile savvy users

some key changes in recent years:

New, low-cost Investment Products: Exchange Traded Funds (ETFs)

US data: https://www.seeitmarket.com/what-are-etf-and-mutual-fund-flows-trends-telling-investors-now-14449/

Help from financial advisors is useful for the average investor but ...

... all evidence points to severe conflict of interest

Regulatory changes force structural changes in fund management

• ban on trailer fees (discussed but dropped!)
• for funds: separation of research fees and commissions 
• best interest vs suitability

=> automation = Robo Advisors!

Let's look at a Big Bank: What does it do?

Main role: Intermediation

• time intermediation
  • people have and need money at different times
• size intermediation
  • many small deposits but firms need big loans
• risk intermediation
  • aggregate and then spread ​idiosyncratic risk  

Traditionally: banks have been necessary ​for the financial system

• gigantic infrastructure
• people need accounts to store money etc. 

What are their roles in the future?

Little bit of history ....

Paid-for vs. valued 

• Keyboard
• Security
• Being businessy
• Cool and cutting edge
• Being Canadian
• Independence from desk

What did they pay for?

What do people value?

• Mobile email

• Safe-keeping of assets
• Moving money around

Blackberry vs. a Generic Bank 

Key Insight: Open Platforms provide value

What took the place of Blackberry?

Future of banking?

A glimpse of a stock trade today

A Tale of Railroads

Economic Insights for Regulation?

Taxonomy of the FinTech Ecosystem

RegTech
Compliance
Security

Crowdfunding

Payments

Lending and Borrowing

Digital Wealth
Personal Finance

Platforms & Open Banking

Data and Analytics

AI&ML

InsurTech

Blockchain, DLT
Cryptocurrencies

Stablecoins

 FinTech

Taxonomy of the FinTech Ecosystem

RegTech
Compliance
Security

Crowdfunding

Payments

Lending and Borrowing

Digital Wealth
Personal Finance

Platforms & Open Banking

Data and Analytics

AI&ML

InsurTech

Blockchain, DLT
Cryptocurrencies

Stablecoins

 FinTech

What I hope you'll get out of the course

1. solid understanding of FinTech ecosystem 
2. basic understanding of critical tools
   • ML/AI + big data analytics
   • blockchain tech
3. idea generation: find your business creativity!