TECH TUESDAY is a weekly content series covering all aspects of capital markets technology. TECH TUESDAY is produced in collaboration with Nasdaq.
Wall Street technology may be the purview of large financial institutions, but its benefits filter down to Main Street in a very tangible way.
Automation and other advances over the past 30 years enable a middle-class worker making $70,000 annually, with a $100,000 retirement portfolio, to retire a full two years earlier, according to Modern Markets Initiative (MMI), an industry advocacy group.
In a July report, MMI noted that average bid-ask spreads in equity markets have narrowed by 50%, and the commission on a $100 stock trade has shrunk from $6 to de minimis.
“Over the past decades, capital markets moved from analog – pieces of paper traded on an exchange — to digital,” MMI CEO Kirsten Wegner told Traders Magazine. “The digital revolution of the stock exchanges, and electronification of market making on the exchanges, have resulted in historically low-cost trading.”
“Our study shows that for investors across the board, thanks to market automation, the cost of trading is now pennies on the dollar. Whether an investor wants to get in or out of the markets, it has never been lower cost,” Wegner added. “There are real-world benefits for investors from these seemingly small, incremental savings over time.”
The MMI study analyzed multiple savings vehicles utilized by American investors, including public pension plans, 401 (k) plans, Individual Retirement Accounts (IRAs) and 529 college savings plans, as well as exchange-traded funds (ETFs). Market technology saves California 529 plans $61 million per year on average, enough to cover tuition for 6,100 students; public pension funds save $125 million per year, representing 9.5 million work-hours.
Since the 1990s, electronification initiatives, including automated trading technology and improved exchange technology, have brought down the cost of trading and broadened accessibility. This has happened in conjunction with regulatory developments such as decimalization and Regulation National Market Structure (Reg NMS), which expanded competition.
The net result has been more money in the pockets of investors in investment plans, pension funds and 401(k)s, and fewer fees going to intermediaries.
“The electronification of the markets has leveled the technology playing field between Wall Street and Main Street, providing far more equitable access to the markets for retail investors at a time when savings and investment have never been more important to many,” Wegner said in the July 2022 report, which was a follow-on to a 2021 report.
Given the increased participation of retail investors in capital markets, it is vital to encourage financial literacy, risk management and transparency, according to the report. Wegner said regulatory policies need to be data-driven and consider the interests of a wide cross-section of industry participants, and regulators have the resources they need to detect and deter market manipulation.
“With an unknown time horizon for ongoing uncertainty – geopolitical, inflation, supply chain and COVID-related – it must be recognized that a dominant attribute of today’s modern markets is that the mechanics of the market function and operate efficiently and that retail investors have dependable liquidity and maximized cost savings,” Wegner said.