Despite persistent political gridlock in Washington, 2023 showed a rare whiff of policy promise in the important area of financial markets practices: adapting to rapid changes in technology driven by artificial intelligence (AI). Even through a year economically challenged by persistent inflation, rising interest rates and choppy stock market performance, automated trade execution and regulatory technology (RegTech) have kept the markets operating efficiently with high levels of investor protection.
As policy makers look ahead to what 2024 might bring, technological innovation and further automation of the markets will play an increasingly vital role in the financial security of Americans investing and saving in the markets. Key trends for regulators and lawmakers to watch closely:
(1) Optimism and ongoing retail investor participation, ESG focus for young investors
Online trading for the retail investor is now virtually free and with near instantaneous trade execution. Since the so-called “meme stock” frenzy of 2021 (think GameStop), retail investor participation has remained high, with data pointing toward optimism in investing to achieve financial goals. In 2023, the markets saw ongoing participation by individual investors, reaching $7.2 trillion in size, and making up more than 20 percent of market share, an increase from a typical baseline of 10 to 15 percent before the pandemic. Further, data indicated that young investors were more willing to give up returns for ESG values, with over 85% of Gen Zers willing to accept returns below the S&P 500’s annual average gain. This increased base of retail investor trading, and the trend of young investors pursuing “impact” driven investing, over mere returns, is predicted to continue into 2024, fueled in large part by low-cost trading and advances in technology.
(2) Expanded focus on artificial intelligence in trading
The role of artificial intelligence will likely increase in 2024, both from the perspective of trade decision making, as well as RegTech capacity, such as assisting firms with detecting cyber breach or fraud, as well as from a compliance and back-office capacity of regulatory filings. The deployment of AI will be an important tool, useful in further driving down the cost of trading and increasing reliability and security of market participants. The global market for AI in fintech is projected to more than quadruple to $54 billion by 2032, up from $11.76 billion last year. The Securities and Exchange Commision (SEC) has indicated it is using artificial intelligence to help surveille the markets and assist in investigations. SEC Chair Gary Gensler has noted his concern about a “nearly unavoidable” financial crisis driven by AI that could contribute to a market crash in multiple areas of the economy, be it housing, the equities markets, or otherwise, and the need for regulators to keep up with innovations.
(3) RegTech matures to find new compliance efficiencies
With the rising number of enforcement actions from the SEC and over 50 pending regulatory proposals published since Gensler’s tenure began, the private sector will need additional tools to keep up with audits, scrutiny, and compliance with new provisions. Companies will further invest in compliance technology in the space of RegTech, in which processes are automated for monitoring trading activities, utilizing AI, natural language processing, machine learning and other technologies for surveillance and compliance infrastructures solutions. RegTech spending across industries is estimated to grow to $204 billion by 2028, up from $25 billion in 2019. Automated trading platforms will continue to play a positive role in efficiency of the markets, transparency and execution, so that investors are getting the best price. The broader application of automated trading technology, as a trend, has already brought down the cost of trading by 50 percent for average retail investors, providing investors with 30 percent more in lifetime savings as a result of high frequency trading (HFT).
(4) More Applications for Spot Bitcoin ETFs, Consideration of Safeguards Such as “Digital Drivers License” in Underlying Markets
With the anticipated expansion of the ETF industry in 2024 into the space of crypto ETFs, in the wake of the Grayscale holding, it is anticipated that a growing number of asset management firms will seek approval from the SEC for Bitcoin spot ETF funds. As the SEC considers ideas for safeguards and surveillance of the underlying assets in the crypto ecosystem, with reports that up to 70% of crypto trades are wash trades, one concept under consideration is Rep. Bill Foster’s (D-IL) idea for the creation of a “digital drivers license.” It is anticipated in 2024 that lawmakers will continue to explore such a concept for a digital identifier, which would allow citizens to have an anonymous unique digital identifier, tied to digital wallets, to help prevent market manipulation, among other potential applications.
(5) Demand for Dependable Liquidity and Low Cost Trading
Consumers will continue to demand efficiencies, and to ensure further removal of inefficiencies and fees in the cost of trading. According to a 2023 report, investors have already benefited from HFT automated trading technology, which has brought down the cost of trading by 50 percent for average retail investors, providing investors with 30 percent more in lifetime savings as a result of high frequency trading (HFT). Through further innovations in liquidity provision, and expansion of HFT trading technology more broadly into the mainstream, investors can anticipate to continue to see further efficiencies in liquidity provision.
The price performance of our nation’s markets can vary between bull and bear, but successfully adapting the latest innovations in technology to both the operation and the regulation of markets must continue to ascend. The U.S. capital markets are the envy of the world, and we must continue to invest in tomorrow’s technology not just to keep up – but to maintain our global edge.
