By Chaahat Khattar
For over 300 years, share trading relied on stock prices published in newspapers only twice a week. It was impossible to buy or sell any instrument without physically meeting the other interested party. There was a time when it took over a month for daily financial instruments trading to cross USD 1 Billion mark but today SENSEX (the benchmark index of National Stock Exchange of India) clocks trading over USD 30 Billion per day on an average. The costs have decreased, time has drastically come down from weeks to seconds for settlements and moreover physical distance is no more a hindrance. Technology has literally made the world a smaller place. A prospective investor sitting in New York can start his day investing in London and can end selling his stocks to someone sitting in Australia. The entire process might need just couple of mouse clicks. On the other hand, we have media. The financial markets across the globe react to two major phenomenon- Speculation or Sentiments. Speculation requires experience along with technical skills whereas sentiments require nothing but perception. Perception can be artificially created and the main influencer for the same is media.
Let us first discuss the evolution of technology and its impact on financial markets before we move on to media. Technology has long been an essential behind-the-scenes partner in the financial services industry, providing the innovative incremental advances necessary for the industry to upgrade and expand its services. In October 1986, Stock Exchange Automated Quotation (“SEAQ”) system replaced the traditional trading floor system at London Stock Exchange (“LSE”) and that let to the Big Bang change in the way the world dealt in financial markets. The SEAQ system enabled brokers to buy and sell stocks on LSE virtually. This led to seamless access to markets at reasonable cost and daily number of trades on LSE increased multiple folds touching daily ceilings on constant basis.
When we talk about flow of information, one can now track movement of every financial instrument, organization or institution at every point of time without worrying about to check daily newspaper or walking down to the broker or banker. From issuer of financial instruments point of view, just a simple upload of notification of any financial instrument on internet does the job saving probably millions as operational costs. Technology has also led to democratization of financial markets where retail investors can invest the way the want to without being dictated by brokers. Stock exchanges, major fund managers and financial companies are investing in technology at an ever increasing rate. Technology has become the backbone of the life blood of the stock markets as more reactive the technology becomes, the faster and more efficient transactions made. We could never imagine circuit breakers in early 1980s because it was just humanly impossible to restrict trading within seconds but as a result of technological evolution we have a much regulated, controlled and monitored financial markets.
Also, since computers and data base management systems keep an electronic trail of all transactions, the audit trail of all transactions stay in tact helping big time in preventing fraud or malicious trading.
Technology has indefinitely changed the way world used to trade in financial markets but it also has a dark side to it. The 1987 stock market crash across the globe was a result of rapid technologic development and its viral nature. The crash started from Hong Kong and spread to Europe, Americas and other parts of the world in minutes. It all began with a simple fall in one type of securities but it was because of technology that led to rapid stock executions based on external inputs, such as the price of related securities.Cooked books, manipulated accounting policies (Enron and Satyam are classic examples) and betting against the odds on financial markets are all result of using technology for greed. Also, data theft, parking or flow of funds and identity theft are major worries of technologic development in financial markets.
Technology is like a vaccine, it keeps the markets healthy but an over dosage of it or too much dependence on the same can lead to catastrophic effects.
Coming down to media, media is just another name for mass communication. As we discussed above, sentiments are largely based on media speculation. Theoretically, media has no role to play in financial markets as information is incorporated in to stock prices as soon as it made public. On the practical front, media played an elemental role in the crash of financial markets in 2008. The companies did have issues with cash flows but if there existed one such company in an industry of over 10 companies, the entire industry index crashed. Certainly that can not be result of flow of technical information but a mass information disbursement that made retail investors believe that all such companies are part of the financial conspiracy. It is due to media that information diffuses gradually across the investor population and that this gradual diffusion affects prices.
We have more news channels on television than general entertainment channels. A study conducted in Paris indicated that on an average the trading on stock markets was 18% lower in case of newspaper strikes leading to lower volatility levels. The investors gain by getting updated on second by second basis on any kind of information they are looking forward to. For firms and institutions, media is the perfect way to disseminate information, save costs by reaching larger audience efficiently and moreover project or change its image in the mind of investors.
Media on the other hand seems to have too much influence these days that its quite concerning. The latest example is the Hash Crash where the hacked account of Associated Press news agency on Twitter (a popular social networking website with over 500 million members) posted that the President of United States of America has been injured in an explosion at the White House. Wall Street lost close to USD 136 Billion within minutes of this news clearly depicting how wrongly powerful media has become.
Both technology and media are eminent and indelible part of this ever growing financial world. They both have their flaws but at the same time they both are now indispensable and inseparable part of the financial markets. The only factor which is important is that how we use and perceive them. Just like an army uses weapons for defense and terrorist use them in offense, similarly media and technology are such tools that every other hand will have a specific way and motive of using them.
Chaahat Khattar is an ardent economist and is working with an international consultancy firm. He is an MBA and pursuing Masters in Business Laws. He is also a Harvard University alumnus and a certified financial modeller. He has keen interest and experience in authoring research papers and case studies and have contributed to various renowned journals. Chaahat can be reached at [email protected]