High Frequency Trading Debate

To conclude and sum up the last five articles, I would like to introduce this video, which is a debate about the advantage and disadvantage of the high frequency trading.

The Flash Crash

“On May 6, 2010, in the course of about 30 minutes, U.S. stock market indices, stock-index futures, options, and exchange-traded funds experienced a sudden price drop of more than 5 percent, followed by a rapid rebound. This brief period of extreme intraday volatility, commonly referred to as the “Flash Crash”, raises a number of questions about the structure and stability of U.S. financial markets”.

The video is a recording of a trader from the S&P 500 futures during the flash crash on May 6 2010

A survey conducted by Market Strategies International between June 23-29, 2010 reports that over 80 percent of U.S. retail advisors believe that “overreliance on computer systems and high-frequency trading” were the primary contributors to the volatility observed on May 6”

Source: The Flash Crash: The Impact of High Frequency Trading on an Electronic Market- October 1, 2010

The reason for the the Flash Crash of may 6, 2010 still a mystery.  No evidence shows that the responsible are the high frequency traders. However, the investigation conducted by the SEC and The CFT, concluded that a trading firm, which the name has not been mentioned in the investigation report, executed a computerized trade of 4.1 billion dollar. (Read more)

Some argued that the trade was not intentional, but a bug in one of the firm's machines was responsible for this heavy sell-off. On this topic, staff at Nanex, a computer programing company, made a comment on the event: : “On the subject of HFT systems, we were shocked to find cases where one exchange was sending an extremely high number of quotes for one stock in a single second -- as high as 5,000 quotes in 1 second! During May 6, there were hundreds of times that a single stock had over 1,000 quotes from one exchange in a single second. Even more disturbing, there doesn't seem to be any economic justification for this. In many of the cases, the bid/offer is well outside the National Best Bid/Offer (NBBO). We decided to analyze a handful of these cases in detail and graphed the sequential bid/offers to better understand them. What we discovered was even more bizarre and can only be evidence of either faulty programming, a virus or a manipulative device aimed at overloading the quotation system.”


Even if the name has not been mentioned on the official reports, Waddel and Reed, a investment company has been the target of many blames because of its likelihood to execute these kind of orders.

The massive sell-off was not the only reason that lead to the Flash Crash. The sudden injection of 4.1 billion to the stock market created a great deal of stress and panic, which lead all computers on the network to sell positions dragging the stock market down. In reaction to this, many high frequency trading firms just turned of their computers and left the office. Manoj Narang, the CEO of a high frequency trading firm, said: "Flash Crash was worst day for high frequency traders...We hit our stop-loss as the market was going down,... we turned our systems off... We did not turned the high frequency trading system on for the rest of the day " 

The video is called the truth about May 6,2010 and express an opinion about the linkage of the Flash Crash and High Frequency Trading.  


As a response to all the criticisms against high frequency trading, Manoj Naranj argued against these accusations during an interview conducted by Bloomberg, the content of the interview is available on the following 
video

The Dark Side of High Frequency Trading

Please click to see the video

The video is about Senator Ted of Delaware explaining high High Frequency Trading became a large bubble that dominate the market and even too big to be regulated.

High Frequency Trading has dramatically grown since its beginning in the late nineties. Today it became the ultimate force that control and manipulate the stock market. With their sophisticated computers, High Frequency Traders influence and anticipate slow traders moves and even behaviors. In july 2009, an example of this type of manipulation happened. The issue of the New York Time released on 07/24/2009 discussed this.  

“It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity to protect his job.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.

The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.

In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.

Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.

The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.”

In addition to action and behavior manipulation of slower investors,  High Frequency Trading can create a crash on the stock market like the one happened on may 6, 2010, and more popular as “The Flash Crash”*, in which the Dow Jones Industrial Average plunged about 900 points (about 9%) and recovered those losses within minutes. This kind of situation can occur given that all the transactions made by the High Frequency Traders are done through machines and robots that use very complex algorithms. As opposed to a human being, a robot is only able to perform the tasks it has been programmed for. Also, robots, computers, and machines can “bug”, which can be dramatic for the market given the access of computers to liquidities, and the network that relates all of them to the stock exchange. "The interaction between automated execution programs and algorithmic trading strategies can quickly erode liquidity and result in disorderly markets," said The the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission report about the Flash Crash of May 6 2010 .

Are Computers Better Than Humans?

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This video features a debate between Steve Kroft, 60 minutes presenter, and Larry Leibowitz, the chief operating officer of the New York Stock Exchange (NYSE). The point of Mr Leibowitz is that HFT is beneficial for the market and investors. However, Mr Kroft counters this argument by stating that computers are not humans and do not have the capacity to analyze of the companies and stocks that they trade objectively. 

Also, an important point related by William H. Donaldson, former chairman and chief executive of the NYSE and current adviser to a big hedge fund, was that individual investors are losing their advantage compared to bigger institutions that have the financial and technical resources to use high frequency trading methods. Indeed, when Mr Donaldson  said “This is where all the money is getting made,” ... “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage,” he was referring to the edge that high frequency specialists have over ordinary investors. 

In addition, not only are individual investors facing challenges on the trading market, but firms, banks, asset managers, and hedge funds that do not equip themselves with the most sophisticated material are not able to compete. Even geographical location has an important role in the high trading process. In fact, the high trading professionals who are able to locate themselves closer to exchange servers reduce their time by microseconds when they place an order, increasing their benefit by millions of dollars.  “By co-locating,” says Adam Afshar of Hyde Park Global, a high-speed trading firm, “we are able to take 21 milliseconds off our trades. In the past, 21 milliseconds was a trivial matter. Now it’s a pivotal matter.” Several academic studies have found that shaving even one millisecond off every trade can be worth $100 million a year to a large, high-speed trading firm.

To read more please click: Wall Street's secret advantage: High-speed trading. The week june 28, 2010

High Frequency Trading helps small investors!

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On this video, the high frequency trader Manoj Narang argus on the benefit of the HFT on small investors. 

To understand the advantage of HFT, it is interesting to review the history and see the reason of introducing this method to the market. In 1996, the justice department fond 24 cases of anticompetitive conduct from major market makers. That created many pressure on the stock market increasing trading commissions for individual and institutional investors.

Later, in 2003, New York Stock Exchange specialists executed trading orders for their own dealers prior the public customers order violating this way Federal Securities rules and exchange rules.

These two scandals made the SEC issuing regulations that took off from traditional market makers the privilege of ruling Wall Street. 

A key SEC regulation was the creation and growth of all electronic trading alternative system known as ATSs that make market makers to display the best priced limited orders to buy or sell which gave the general public to enjoy better trading prices. 
Please click to see: Regulation of Exchanges and Alternative Trading Systems

Ultimately, these reforms were a key of the emergence of new professionals traders that began competing against traditional Wall Street traders. These new professionals was are able to use automated computer programs to enter orders directly on the market, they are know today as “high frequency traders”.

According to the previous video, the High Frequency Trading provides to the financial market liquidities. In fact, if every trader has only long term investments, the market would frequently suffer from stock shortage. Also, HFT firms help to tighter the bid- ask spreads (difference between the bid and ask), reduce the trading costs, and triple the trade volumes.

Please click to read more

High Frequency Trading

Click here to see the Video

The video describe the new profession, high frequency trading, that newly appeared with the emergence of the ICT. The speed traders, which are computer robots ruled by mathematicians and engineers (quants), replaced the traditional trader who was ruling Wall Street for more than 150 years.

High frequency trading is no of the two type of electronic trading. The first type is the manual trading where orders are executed by humans using an electronic platforms, an the second type is automated trading, where instructions are executed by computers algorithm, with a little or no human intervention. This second type is also called high frequency trading or HFT because of the very short term holding of  securities.

HFT is also divided into two type:

“Algorithmic execution: a human trader decides to trade but uses an electronic trading program to execute the trade. This is often used for larger orders. For example, the program may use smart order routing to choose where to best trade, or it may use a time- or volume-weighted method to execute the dealer’s trade to achieve the best price.2 Bank traders may use this type of approach to trade via an aggregator; real money investors may use a time-weighted approach to drip- feed a large order to the market. 

Algorithmic trade decision-making: a firm builds a model to initiate a trade based on certain key input parameters such as order book imbalance, momentum, correlations (within or across markets), mean reversion, and systematic response to economic data or news headlines. Once a trade decision has been made, the algorithm also executes the trade. Banks’ automated risk management tools may also use this method to offset risk automatically. Hedge funds engaged in model- based strategies and specialized HFT funds operate in a similar fashion.”

(High-frequency trading in the foreign exchange market Report submitted by a Study Group established by the Markets Committee. This Study Group was chaired by Guy Debelle of the Reserve Bank of Australia. September 2011)

This article is going to emphasize on the Algorithmic trade decision making according to the video above, and talk about its impact on the players and the market.

The new players that are using this technics (mainly large banks, hedge funds, and mutual funds) make profits on basis of trading large number of positions in very short amount of time (second or micro second). By taking advantage from very fast and powerful computers, they are able to get any market information shortly before all other players (other firms, individual traders...), so they can detect any profitable trading opportunity in the marketplace and translate a micro-second to millions or even billions of dollars. 

To earn this competitive advantage has attracted a considerable number of players. Five years ago, 30% of the traded stocks where performed by High Frequency Traders. Today, the number has increased to 70%. To have a vision on how the emergence of new technologies which make the use of HFT possible, I would like to see how new technology changed the structure of FX (Foreign Exchange) market.

The diagram shows the emergence of new players in the FX market after the apparition of HFT trading techniquesThe red lines denote electronic communication; the black lines denote voice communication. HFT = high-frequency trading firm; SBP = single-bank platform; MBP = multi-bank platform; ECN = electronic communications network; Exchange = Chicago Mercantile Exchange, for trades involving FX futures. * indicates prime brokered transactions, which are initiated by the clients but appear (to counter-parties) in the prime broker’s name.

Source: (High-frequency trading in the foreign exchange market Report submitted by a Study Group established by the Markets Committee. This Study Group was chaired by Guy Debelle of the Reserve Bank of Australia. September 2011)

To read more about the: Research Study

Overconfident Investors

This First video is an introduction for behavioral finance. Also, NBR's Dan Grech is examining some psychological factors that affects investment decision and one of them is overconfidence.

This Second video is illustrating the impact of overconfident investors on the market.

Barber & Odean (2000) and Glaser & Weber (2004) performed research to investigate if the new trend of individual online trading might affect the market. One of the conclusions was that the new investing method has increased the level of trust of the investors “by providing false sense of knowledge and an illusion of control, but also by modifying the fundaments of investment decision-making” (Voicu-Dorobanţu Roxana and Marinoiu Ana Maria 2009). This citation reflects that large amounts of information leads to overconfidence and rapid and flawed decision making methods. 

Also, information collected by investors is meant to be used to make predictions and make decisions based on these predictions. However since the apparition of the Internet and the amount of information offered lead to a lower precise prediction because of the level of information saturation is reached, from that point on being created just the illusion of knowledge. Thus, investors think that they are able to pick stocks better than they really do. Confirmation of the information is a real time feedback method that also increases the overconfidence level. In this process investor enter in contact subconsciously with other investors that have the same pinion and ideas about stock piking, earning predictions, and investment ideas. The investors, since the proliferation of the Internet, can virtually meet in forums for example, and they share together the same analysis and  conclusions and confirm them. This process increases the confidence and can lead to bad decision-making. 

Internet is clearly a key to overconfidence of the investors Data providers encourage this belief with ads such as one (from eSignal) that promises: “You’ll make more, because you know more.”

Overconfident investors can be dangerous for the stock market. Theoretical models state that the over-confidence level will make the trading frequency and the speculation level higher. Additionally, over-confident investors will have a less diversified portfolios thus a higher risk for them self and  higher volatility for the market. 

Before the apparition on the online brokerage, trading a stock was not done without multiple phone conversation between the client and his or her broker, who is going to give advices, and market tendencies. Currently, with the ability to trade online, trading frequency has grown exponentially and so the speculation rate. Balasubramanian, Konana and Menon (1999) list “Feeling of empowerment” as on of the basic reason for switching to on-line trading. 

The relation of online trading and its relationaship with overconfidence has been the topic of many researches. 

Literature review:

“Frequently, in literature, the discussion about the increase in the confidence level of the investor while online appears as an answer to the question related to the increase in trading volume. In like situations, a two-pronged approach may be encountered: the ”over-confident” investor, previously described and the „opinion differences”. The former has already been discussed, while the latter is motivated, at least at a theoretical level, by the research from 1985 and 1989 of Hal Varian. Varian generalizes the paradigm average value volatility in order to allow the use of different previous probabilities. Each investor has his own probability distribution, previously created and subjective, for the value of a risky asset. It is assumed that the values are normally distributed and have different average values. In his research, Varian (1989) has proven the fact that the trading volume is essentially determined by the differences in opinion. The net equilibrium volume for an investor depends exclusively and directly on his deviation in opinion from the average values. Harris & Raviv (1993) assume the fact that the investors starts from the same assumptions, they receive public information, which they interpret in different ways (for example, by using different actualization functions for the probabilities), hence causing differences in opinion. Kandel & Pearson (1995) model the differences in opinion as it follows: the investors receive a public signal that is the sum of two variables: the liquidity of a risky asset and a random error factor, whose average value is the difference in opinion. Morris (1995) and van den Steen (2001) have shown in their research that the differences in opinion depend on rationality. Shiller (1999), Barberis & Thaler (2003), Hong & Stein (2003), and Diether, Malloy & Scherbina (2002) consider the differences in opinion to be yet another form of over-confidence: the investors assume that their information and their valuation abilities are better that the others.”

From all the studies that has been made, the face that overconfidence of the investors is clearly related to the the apparition of new  trading technologies. The multiplication of these kind of investors, might create a devastation threat for the market and thus for the economy.

To read more about the question: 

What Makes Investors Overconfident? Evidence from Amman Stock Exchange

Overconfidence and Trading Volume

The Courage of Misguided Convictions

Information: Fraud and Manipulation Attempt

The direct placing of order created a feeling of security and control over the result of transaction, and the large quantity of information related to investment, such as investment ideas or advices. However, it became difficult to distinguish between correct and valuable information and the bad information because of the high volatility of the advices due of the large number of sources, in addition to the fraud and manipulation attempt.

“Manipulation is one of the important issues in securities markets because manipulative actions send false signals to investors and make them buy or sell securities they otherwise would not buy or sell” (Predicting financial information manipulation by using statistical methods and neutral network Ramazan AKTAŞ, Ali ALP, M.Mete DOĞANAY)

Since the apparition of the first Stock Exchange in Amsterdam during the seventeen-century, brokers discovered a good method to destabilize the stock market by manipulate the investors. The goal of that was to take advantage of a massive selloff leading to drop the prices in order to buy back at lower levels. This manipulation of stock prices increases by spreading rumors about firms, banks and economies.

Amsterdam Stock Exchange 1602

One very popular example has occurred in 1815 during the battle of Waterloo between the Duke of Wellington and Napoleon of France. The London financier Nathan Rothschild, because of his powerful network, was able to obtain the information that the Duke has defeated Napoleon during this battle before everyone else. However, he took advantage from being the only one in England to have this valuable information and spread the rumor that Napoleon was glorious. Given his authority in the British financial market, Rothschild created with his wrong information a massive drop in British government bond prices and he took advantage of lower prices to buy up the entire market in government bounds. With this manipulation act, Nathan Rothschild became the dominant holder of England’s debt.

    

 Waterloo battle 1815 

More recently, on April 5 2012, Faruqi & Faruqi, LLP, a leading national securities law firm, is investigating potential securities fraud at Chelsea Therapeutics International, Ltd.


Chelsea Therapeutics International, fraud accusation (Article)
Chelsea Therapeutics (Nasdaq:CHTP - News) is a biopharmaceutical development company that acquires and develops innovative products for the treatment of a variety of human diseases, including central nervous system, rheumatoid arthritis, psoriasis and other inflammatory diseases. Founded in 2004 around its library of unique anti-inflammatory and autoimmune technology, Chelsea has further expanded its product development portfolio with early and late stage candidates that leverage the company's development expertise and accelerate the company's drug commercialization efforts (Yahoo Finance).

Faruqui & Faruqi LLP is aqusing Chelsea Therapeutics of violating federal law. In fact Chelsea Therapeutics has done an information manipulation by hiding key information on its company. The company was waiting for an approval from the FDA on March 28^th for one of the drug that Chelsea wanted to introduce to the market. The company hided the fact that the drug is more likely to be rejected and also the drug was no meeting the standards of safety.

According to this information, many blogs, financial reviews were advertising the likeliness that the drug is going to be approved from the FDA on the scheduled date. On Minyaville.com, a financial online news provider, for example was confirming with 61% probability that the drug would be accepted "Two other companies Affymax (AFFY) and Chelsea Therapeutics (CHTP) are expecting drug-approval decisions by the FDA today and tomorrow"

Minyanville.com Article (Article)

Many investors have followed the rumors, what made the stock bullish to more than 15% the day before the FDA decision. Finally on March 28^th 2008, the FDA rejected Chelsea Therapeutics request for approving its new drug and the stock went down more than 30%.

This chart illustrate the quality of CHTP's shares traded (green columns), with correlation with news' released (grey columns) and the stock price (green line).Prior the FDA decision on March 27th and 28th informations have been released, a large number of shares have been traded (6,239,821 shares on March 28th), which drives the stock price to $3.67 (15%). After FDA rejection on March 28 night, about 9 million shares has been traded on a movement of panic and drove the shares down 30%.

By facilitating the access to information, Internet has increased the power of the people trying to manipulate the market.

To read more about the issue:
 Financial information manipulation (Research Paper) .pdf

Information Saturation Level

Video: Friedman: The media to blame for apple selloff.
This vides illustrate how the media can affect the investors. In this case, the largest in term of market cap and most traded company "Apple"  is in the center of attention. On tuesday april 24, Apple is going to released its quarterly earnings and the speculation about are the numbers going to beat expectation started since couple of weeks already on the medias. That made the stock going to its all time high on april 10 2012 ($644), followed by a correction and went down 10% one week later on April 16 to $577, and went up again the day after on april 17th (5%) to make another correction of 3% on april 19th (See the chart bellow). This high volatility is due according to Friedman to the media, others would blame the high speed traders (See the CNBC's video of the April 19th (Video)

“The proposition that more information leads to better decision-making is intuitively appealing. But the truth of the proposition depends on the relevance of the information to the decision and on how well equipped the decision-maker is to use the information.” Brad M. Barber and Terrance Odean (2001) The Internet and the Investor.


Inexperienced investors have quick access to large amounts of investment information via the Internet on web sites such as Yahoo Finance, Motly Fool, or Bloomberg. Also, investors are now able to access millions of pieces of financial data. For example, an investor can download daily high, low, closing prices, volume, and returns data from Microsoft’s investor website (http://moneycentral.msn.com) for up to 10 years for all publicly traded stocks in the U.S. Assuming 10,000 publicly traded stocks with an average history of five years, these data alone represent 63 million bits of information. (Brad M. Barber and Terrance Odean (2001) The Internet and the Investor).

Thus, the Internet has a direct influence on the type of information the investors are going to focus on. Instead of looking for valuable information, they have the tendency to seek the less costly and the more readily available types of information.

Many recent academic articles have argued that after the increases in stock prices over the last decade, the expected equity premium is low and perhaps negative (Lee, Myers and Swaminathan, 1999; Fama and French, 2000; Shiller, 2000). In fact, inexperienced traders have transformed the stock market to what is called a speculative bubble. Shares of companies are not priced to the real value of the company but more on quantity of shares traded, driven by the news available online.

The case of 3Com and Palm is such an event

"On March 2, 2000, 3Com sold somewhat over 5 percent of the shares in its newly created Palm unit about 4 percent in an initial public offering and about 1 percent to a consortium of firms intending to distribute the remaining shares to 3Com shareholders later that year. Based on the number of shares outstanding, each share of 3Com included ownership of 1.5 shares of Palm. Yet on March 2, 3Com closed at $81.81 and Palm at $95.06. An investor who bought shares of Palm could have instead bought the same number of shares of 3Com for less money and ended up owning 1.5 times as large an interest in Palm plus an interest in 3Com’s non-Palm operations. To put the same point another way, at the close on March 2, the value of 3Com’s shares in Palm were approximately $51 billion, while the market value of 3Com’s equity including its shares in Palm was $28 billion. Either the market was valuing the non-Palm portions of 3Com at a negative $23 billion even though the non-Palm portions of 3Com had in November 1999 reported an operating income of about $750 million over the previous 18 months, or investors were seriously overpaying for Palm" (Lamont, 2000).

This is the perfect example of the saturation and volatility of information that lead to mis-procing and a speculative bubble. The large amount of information collected from many different sources lead to the uncertainty of the future value of the shares and to more cash invested than the share value.

“Speculative bubbles can also be manifestations of the “winner’s curse.” In auctions where bidders have different but unbiased beliefs about an object’s value, the high bidder is likely to be an individual whose initial estimate of value exceeds the object’s true value. The winner’s curse is more likely when there are more bidders, when the dispersion of opinions about the value of whatever is being auctioned is great, and when price is set primarily by those with the highest opinion of value.” (Thaler (1988) in this journal for an overview of the winner’s curse.).

To read more:

Internet and the Investor (Research Paper) .pdf

ICT impact on a profession: Elimination of the intermediaries

This video describe the evolution of trading stock from the issue of the self regulation and national market amendment on May 1st 1975 to the introduction of Internet online trading  in the nineties. The story is told through one of the bigger players “Ameritrade”, who was one who introduced the concept of discount trading and Internet trade to the market . 

Additional Link: The Self Regulation and National Market Amendment (SEC 1975)

For years, only professional stockbrokers, Hedge Fund professionals, or asset managers with expensive computer hardware could trade online. They had privileged access to valuable information. In order to buy or sell stocks, bonds, ETF, or commodities, an individual investor was required to place orders through their professional wealth managers or stockbrokers, who charge commissions estimated to 2% to 2.5% of the value of the order. The professionals offer their clients detailed research reports, stock recommendations, and financial planning services.

In 1994, a small discount broker, K. Aufhauser & Co, saw the opportunity use the advancement of ICT to offer their clients the possibility to trade online over the Internet. Aufhauser was now able to operate with fewer personnel because the client was investing his money directly in the stock exchange. The company also took advantage of a significant cost saving which additionally benefited customers in the form of lower trading costs. This situation allows for the idea that the cost savings are justified because the intermediary appears to function solely as a facilitator of trading.

However, the flaw in this reasoning is the failure to consider the valuable advisory role of these professionals in the trading process.

Following Aufhaser, the low barrier to entry level brought this new market many small companies that took advantage of the internet to offer their clients online trading platforms. The commissions were dramatically bellow the one previously offered by the brokers. For example, by early 1999, a company such as E-trade was charging between $14 and $20 per order, while a company like Merrill Lynch was charging $500 for a full service broker four years prior.

By the mid 2000s, the estimated number of new companies such as TD Ameritrade, Scottrade, and  A*Trade, was 150 and started to compete with large renamed brokerage companies. These companies lowered the commissions again as low as $6.99 or even totally free by the end of the 2000s. By the same period, the volume of online trades represented 40% of all stock traded.

For many wealth managers and brokers, this situation marked the beginning of the end for the profession in the short term, and for the global economy in the long term. In fact, they argued that their high commissions were well justified because of the valuable information and advice that they provided to their clients. The pressure put on broker companies created the necessity for them to adapt. The landmark event occurred in June 1999 when Merrill Lynch, the world largest full service broker, started offering online trading. 

This situation is one of the causes that lead to the financial crisis in 2008 because of the creation of a speculative bubble. Assording to the research of of Smith, Suchanek, Willians (1988), Caginalp, Porter & Smith (2000) and Schiller (2000) “ the number of non-experienced investors is larger than the number of experienced investors, the uncertainty towards the future value of an asset as opposed to the risk, the more money to invest” that creates a speculative bubble.

How Internet weakened the financial market and so the asset management?

The impact of market security and safety system

The rapid emerging of the Internet as a global public network emerged as a menace for the financial market industry. The advancement and accessibility of the World Wide Web threatens to eclipse the importance of the global information infrastructure put in place by financial institutions and their regulators over the past three decades.

The advancement and development of the ICT has a real impact on the value of the edge of the financial institution because of their closed networks.

The first concern that faced the financial markets was if they would have the ability to adapt in terms of maintaining security and safety. The growth of global networked information systems creates threats to the safety and stability of financial markets. The reason is directly related to the evolution of the means of communication, which makes information and transactions easier to exit from the internal network to non-authorized users. This phenomenon could destabilize markets and also global economy, which constitutes a threat for the financial market industry.

Banks have also faced challenges from disintermediation for many years, as alternatives to bank services, such as securitization of corporate debt and money market funds for individuals eroded some of their core customer base. Clearly, the evolution of the information and communication technologies has a role in making the financial market more vulnerable to destabilization.

For this reason, wealth and asset management has become an increasingly difficult and delicate function.

What changes Internet brought?

Different way of Internet trading: Computers and mobile devices. 

Today, the Internet has brought billions of individuals into a global computer network. Everything started in 1995, when the use of the Internet for general commercial activities started. After that, a rally started in terms of Internet usage for business-to-business operations.

During the first three years, electronic commerce between businesses over the Internet amounted to $43 billion, while consumer transactions amounted to $8 billion.

The financial market has also seen a radical change. One of the indicators was the apparition of Internet banking. Internet banking is described as the use of the Internet as a delivery channel for banking services, which include traditional services such as opening a deposit account or transferring funds between different accounts and new banking services, such as electronic bill presentment and payment (Jun and Cai, 2001).

Additionally, the Internet alters the way information reaches an investor. The quantity of information is exponentially larger in a shorter amount of time, dramatically decreasing the fixed and marginal costs of the production of financial services.

Additionally, the advancement of ICT has helped many small sized online brokerage companies. Also the financial market has seen more and more new investors who are beginners, a fact caused by the generalization mass trading because of the Internet. Prior to the mid nineties, the market was limited to trained and informed professional investors, but after the generalization of connections means to financial networks, the public has access to financial markets through “The direct placing order”. The intermediaries have been eliminated by the propagation of this process, and one may conclude that the investor has an obvious and quantifiable gain by reducing trading and execution costs.

Also the ICT gave investors a very large amount of information and advice concerning with a real time update. The problem is with the overwhelming amount of information, it has become difficult to distinguish between the correct and useful information and a manipulation attempt.

Finally, Internet has facilitated real time comparisons due to by the exponential speed at which investors receive information. This created a new tendency for short term trading in comparison to medium term trading that was effectuated available before. The reason is that investors now are able to check the status of their investments instantly via computers and wireless devices compared to the traditional financial newspapers couple of years ago. The implementation of new technologies has facilitated the speculation dot.com bubble since the 2000, which has influenced the economy lately leading to the last financial crisis. 

What was the triggering factor that took us into a new era?