How The Investment Market Should Adapt to Accommodate Growing Technologies or Risk More Repeats of The Robinhood Debacle

The volume of retail investors actively trading today is growing exponentially, but as we saw in the midst of the GameStop saga, they’re still having to get by without the protection they need to trade as freely as their institutional counterparts.

Retail investor app, Robinhood, found itself at the centre of the fiasco as the platform, along with other online trading apps, were forced to suspend trading at the height of the GameStop (GME) short squeeze at the start of the year - causing scores of individual investors to lose out on pumping the value of the stock higher.

Investors had congregated on Reddit with the simple plan of buying GME shares in a bid to counteract the masses of short positions taken out by hedge funds. As a result, the value of the stock soared 1,500% on January 27th - leading to Robinhood suspending trading on the exceptionally volatile stock.

While the investing app had to field calls of acting underhandedly on behalf of third parties, Maxim Manturov, head of investment research at Freedom Finance Europe noted that the chaos was likely caused by a lack of liquidity.

“One of Robinhood's major issues is the lack of liquidity against the large demand on GameStop (GME) stock,” Manturov explained. “The company denies any involvement in assisting third parties, as nobody outside the company influenced the decision on the limits. It is more likely that these restrictions are only about a technical need to provide liquidity, and the company needed to take a break to raise cash in order to cover the cost of transactions and pay off investors who wanted to cash out.”

(Image: CB Insights)

Retail investors have increasingly flocked to Robinhood since the start of the Covid-19 pandemic for the platform’s promise of commission-free trading and superior usability. But in light of the app’s behaviour in the wake of the GameStop short squeeze, it’s clear that further modernisation of the financial sector’s more traditional approach to investing is needed.

With this in mind, let’s take a deeper look into some of the emerging technologies that can help to avoid further repeats of the Robinhood debacle in the future:

Intuitive Investment Products

Even before the emergence of the pandemic, global institutions were left facing a range of challenges. In fintech, the technology has developed by asset class, by region, leaving institutions with a highly complex operating model with multiple books and records that leads to greater risk, trapping capital. The notion of standardising these products into one global system could pay dividends for these firms around the world.

Speaking to Bloomberg Live, Tim Gokey, CEO of Broadbridge believes that cloud computing is the future of intuitive investment products. “Near term, I think the impact of cloud is profound. And I’m not sure if that’s looking around the corner…but it’s much more than an infrastructure play,” Gokey explained.

“It’s about modernization. It’s about a whole core suite of software-based microservices, DevOps, with continuous deployment, improved security. It’s gone from clients asking for no cloud to cloud ready to only cloud. And this can be an area where leveraging the modern SaaS service can take some of that work away.”

Cloud-based software will be complemented by the further development of artificial intelligence, which has the potential to be an embedded key enabler within the industry. Institutions require a clean, complete and open level of access to data, and AI can be key in ensuring that technology keeps up with the growing need for more comprehensive financial services in an increasingly digital age.

Striking a Balance With Blockchain

When it comes to considering the technology that will drive the future of finance, blockchain must be a central part of the discussion.

(Image: NIX United)

As we can see from the data above, 29.7% of blockchain’s market value globally is locked up in banking services, and although the tech is more readily associated with the world of cryptocurrencies like Bitcoin, it can play a key role in delivering the next generation of technology to use the complex algorithms required to optimise the future of investing.

It took blockchain no time to outgrow its initial usage as a framework for cryptocurrencies and is instead being picked up for more complex roles across the fintech spectrum. Blockchain could essentially act as the financial middleman for making transactions when investing - helping to pave the way for faster speeds and lower commissions for investors in comparison to the type of services we’re used to seeing today.

Robinhood has drawn criticism from onlookers for the gamification of stock market investing. This type of business model may have been put in place due to the platform’s payment for order flow method of leveraging commission-free trading - an approach that typically generates more money when more trades occur. With blockchain, investing apps will be free to ditch these controversial approaches to generating money with much more simplified investing processes.

Looking to a Transparent Future

To prevent an eventuality like Robinhood’s GameStop saga, greater levels of transparency could be leveraged in private companies, enabling the possibility of accurately ranking and evaluating firms and to offer this information to retail investors.

Speaking to Disruptor Daily, Keren Moynihan, co-founder of Boss Insights said: “By reducing the risk associated with each investment, artificial intelligence and data science can make private investment more accessible to a wider range of investors. Rather than excluding retail investors, implementing new technology to address the valid risk concerns creates a more inclusive environment for all investors.”

What’s clear is that financial institutions need to embrace technology to help deliver intelligent insights, transparency and processes that eliminate conflicts of interest for investors.

The events of the 2021 with the GameStop short squeeze and Robinhood’s subsequent move to restrict trading was a difficult episode to watch play out, but with the arrival of digital transformation in the financial sector, we may soon have access to the solutions that will create a more equal financial ecosystem for all.

This article does not necessarily reflect the opinions of the editors or the management of EconoTimes