NSE generates close to 350 GB of order book message data every day in 6 hours of trading. There are roughly 40 million registered market participants.
As a comparison, Twitter, with 500 million tweets per day, generates roughly 100 GB of data from tweets and it has an estimated 150 million users.
The technology used by NSE is as complex and robust as some of the largest tech companies in the world. Moreover, technology for an exchange is no less mission-critical than a space program.
Like space programs facilitate knowledge discovery, exchanges provide the infrastructure to facilitate price discovery.
Warren Buffet famously said that price is what you pay and value is what you get. However, value is relative and not absolute.
It is intrinsically tied to trust and crowd consensus. Similarly, trading is tied to the desire of people to discover value. Like airports need passengers and airlines, exchanges need investors and brokers to trade and discover prices.
Enabling more people to express their view on value makes the market more efficient. Therefore, as more people join markets, markets tend to become more efficient.
India has only 4 percent of its population in markets compared to close to 60 percent in the USA. This is in spite of the meteoric rise of tech-driven brokers who disrupted traditional broking business models with their easy onboarding and low cost.
While some of the best Indian entrepreneurs are solving demand generation at scale, this surge of demand must be met by choice on the supply side. Like India built a world-class IT services economy, there is an opportunity to export global asset management services too.
As a start, this could be better captured by technology-led quantitative investing instead of fundamental investing. Fundamental investing is based on the premise of knowing better than others, and here local edge is an important factor.
Hence, when exporting global asset management service, an Indian company that has better technology to collect and process data might still be able to sustain its edge over fundamental investors located in the market they invest in.
How significant is the use of technology?
Identifying investment opportunities using technology is not new. It is believed that close 75 percent of equity assets are being managed quantitatively in some fashion. These methods can be largely classified into models that focus on operating efficiency, balance sheet strength, quality of earnings, capital allocations, and external financing activities. Sophisticated algorithms have driven investment decisions for decades now.
From smart order routing in multi-venue exchanges to offer better liquidity, execution algorithms at brokers to lower impact cost for their clients, or running proprietary trading desks.
Many of you might have not heard about Renaissance Technology but it is said to be the most profitable hedge fund. Their proprietary fund is not open to investors outside the firm. It is said to have the best track record of making consistent returns in any market condition.
They are believed to use the mathematical topology of data to extract investment ideas as per remarks made by the founder.
Generally, investment research and long-term investing is built on a weak market hypothesis where it is assumed that public information is yet to be priced in.
Here the main idea is that markets ignore the information. While this might not seem rational, this is actually not that uncommon. The reasons could be that large asset managers might be constrained due to need to develop consensus internally before a decision can be made.
It could also be due to the fact that they are constrained by their mandate. A classic example is that developed market bond yields are negative as many pension funds in these countries and central banks are required by law or policy to keep ownership of negative-yielding assets.
What are the other use cases?
Apart from the use of technology to find investment ideas by upstreaming on data collection, asset managers have used technology as a revenue centre too. For example, the world’s largest asset manager Blackrock generates close to a billion-dollar in revenues from its technology services.
Amundi asset management recently launched a technology services business. TCS has forayed into analytics for asset managers on their SAP platform. In fact, not only asset managers, but asset classes like currency have reinvented themselves using technology like blockchain to create a cryptocurrency.
Tokenized partial ownership of real estate is another area where blockchain is disrupting real estate ownership. It might be possible to import bank statements to generate optimized taxation one day.
Technology has always disrupted traditional models. Right from the prehistoric times when humans could make fire on demand, or farming to grow food on demand, or in the last century to use steam to generate power on demand to now when we get service on-demand via the internet, widespread adoption is the key.
Did you know technology is a word of Greek origin that roughly translates to craft that speaks? Hence, there is an implicit need for technology to be people-friendly that can communicate its value.
Given the way technology has shaped our ability to be included and give equal access, we think technology will create many more exciting investment products to meet the rising demand of differentiation given the surge in demand.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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