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The rise of computerized trading

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When your clients imagine the stock market, what do they see? Do they still picture people in jackets screaming prices back and forth on a trading floor? It’s difficult to imagine areas technology hasn’t touched, even the stock market. The reality is trading today looks much different than it did a decade ago with the introduction of electronic trading.

Explaining the ins and outs of how a trade gets executed may be too granular for clients. However, it can be important to explain to them, at a high level, the way technology has revolutionized trading and the role algorithms and artificial intelligence play. Here are three relevant facts that can be pointed out:

Wall Street: From Manhattan to Mahwah

The New York Stock Exchange is an investing icon — it's synonymous with Wall Street and floor traders. But today, just 22 firms have a presence on the trading floor. That's because in 2010, the NYSE moved the bulk of its operations from Manhattan to a computer warehouse in Mahwah, New Jersey, a fact many on Main Street may not know.

These computers are handling an increasing number of trades, which the NYSE hoped would make trading more efficient. Computers are able to make markets (match buyers and sellers) at a much faster rate than floor traders. 

With electronic trading available, often for free with online trading platforms, buying and selling stocks for do-it-yourself investors has become easier than ever. If this intimidates some clients, they can be reminded that computerized trades, based on sets of rules called algorithms, have been around since the 1980s and the digital revolution is already well-established. As early as 2013, an estimated 70% of trades were electronic and online trading around the globe will continue rising. As innovations come to the market, algorithms and artificial intelligence will become increasingly more sophisticated. Sharing these facts can help terms like "algorithmic trading" and “artificial intelligence” feel less daunting.

Circuit breakers

As trading becomes more electronic and the sheer volume of trades increases, exchanges have created circuit breakers to protect investors.

The "Flash Crash" in May 2010 when there was a roughly 30-minute market crash totaling a trillion dollars, may be a helpful example to use with clients since it was a highly publicized misstep. 

The causes of this crash were complex, but the effects were amplified because trades took place in milliseconds. Because circuit breakers put into place after the 1987 market crash failed to stop the “flash crash” 23 years later, the system was upgraded. Addressing how exchanges have taken steps to prevent a similar incident may help ease any concerns. To combat this in the future, stock exchanges implemented circuit breakers or trading curbs that kick in if a stock (or index) falls more than a certain amount in a certain time period. These circuit breakers are updated regularly to help prevent panic selling.

Focusing on the advantages of computerized trading and systems in place for protection could help your clients feel more comfortable with a new view of the stock market. With time, they may realize that the technology driving the markets could ultimately help them manage their money.

Advancements in technology

The digital transformation reaches beyond market trading to products and processes that give people more opportunities to manage their money. For example, fixed indexed annuities (FIAs) use sophisticated algorithms to offer protection from market loss and growth potential that’s based in part on the performance of various underlying benchmark and custom indices.

Instead of a human asset manager trying to control volatility, custom indices rely on a rules-based algorithm to help smooth out volatility. As the underlying index becomes more volatile, asset allocation is shifted from the high-risk asset to a stable asset (like cash), and when the custom index becomes less volatile, the opposite occurs. No matter what’s happening in the market, the control mechanism seeks to limit volatility to a target level, better cushioning a client against major drops and leading to smoother returns. Some custom index designs even use artificial intelligence to make better financial decisions inside the index and better control risk to help provide better client value.

Two things you can do today:

  1. Ask your clients what they know about the stock market: How familiar are they with the shift from floor-based trading to computerized markets?
  2. Discuss how automation is nothing new, and the various steps exchanges have taken to help protect peoples' money.

Athene focuses on staying at the forefront of innovation. Our index options allow you to tap into the power of new technology with the same security you've come to expect from us.  With more than a dozen index options, discover everything you need to know about the indices powering some of Athene’s most popular annuities.

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