Katya Malinova PRO
I am an Associate Professor, Mackenzie Investments Chair in Evidence-Based Investment Management at the DeGroote School of Business, McMaster University, Canada.
F741: Intro to Fintech
Professor Malinova
What is FinTech?
Why now?
Lecture 1:
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
What drove this change of Wall Street (and the demise of the NYSE as we knew it)?
Why? The machines ...
- 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).
Why? The HR ...
- 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?
entire career streams disappear
MIT Technology Review, Feb 07, 2017
Markets get better: the post earnings announcement drift had been a long-standing puzzle in finance. ... It's gone.
What's the impact?
Source: Martineau (UofT) (WP2017)
The world of Finance as we know it is over
TFSA study on the Future of the Financial Industry
GTA: 800,000 jobs in FI
50% of executives believe that 40% or more of these jobs will change fundamentally over the next 3-5 years
Source: "Unlocking the human opportunity: Future-proof skills to move financial services forward"; PwC report for the Toronto Financial Services Alliance, April 2018
TFSA study on the Future of the Financial Industry
TFSA study on the Future of the Financial Industry
TFSA study on the Future of the Financial Industry
TFSA study on the Future of the Financial Industry
What is FinTech?
Finance
+
Technology
usually post 2008
outside of traditional financial institutions
goal: disrupt existing FIs
this is really squishy ...
(Or is it?)
Why was/is it inevitable that finance would get disrupted?
in a nutshell: why people choose to work in finance
relative wage=avg wage in finance/avg rest of economy
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
-
wages Stanford GSB grads in finance industry
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 ...
High cost industries with high rents?
\(\Rightarrow\) Disruptive entry is bound to take place!
Key drivers?
But why "now" (after 2008)?
Main structural changes?
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."
(& the cost halved)
Moore's Law: the future
A Tale of Railroads
US Standard railroad gauge (distance between the rails) is 4 feet, 8 1/2 inches
Because that's the way they built them in England
that's the gauge used for pre-railroad tramways
the same jigs and tools that they used for building wagons, which used that wheel spacing
other wheels would break on old roads. Because that's the spacing of the old wheel ruts
The first long distance roads in Europe were built by Imperial Rome
Economic Insights for Regulation?
- New risks
- Functions and entities that create market failures change or disappear:
- fewer intermediaries \(\to\) fewer agency conflicts
- but: new entities hold deposits
- smart contracts \(\to\)real-time view of transactions
- but: only as "smart" as their source code (code audit?)
- fewer intermediaries \(\to\) fewer agency conflicts
- Moving to open systems requires international cooperation ....
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
3 years ago many haven't heard of it!
Source: EY FinTech Adoption Index 2017
18%
Things are changing ...
- non-integrated IT systems
Things are changing ...
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
Obstacles
Source: Philippon (2017)
- 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
@katyamalinova
malinovk@mcmaster.ca
slides.com/kmalinova
sites.google.com/site/katyamalinova/
L1 F741 Intro to FinTech
By Katya Malinova
L1 F741 Intro to FinTech
This deck is for the first lecture of the F741 Intro to FinTech class. The slides are organized in a 2x2 matrix, you need to view them "column-by-column". To view the deck, using arrow keys on your computer, please go "down" first and then "right".
