Depending on what side of the stock market you sat, 2022 was either a year of challenges or opportunities.
It will be noted in the history books for hitting bear market lows in the first half of the year, leading to the worst downturn for Wall Street since 2008. With dramatic price swings in both directions as the market responded to external factors - ongoing high inflation, Russia’s invasion of Ukraine and the pandemic hangover - it’s safe to say things were uncertain for the trading world last year.
And then to cap it all off, the $32 billion crypto exchange FTX collapsed, taking with it much of the confidence built among investors in cryptocurrencies. Evgeny Gaevoy, CEO of crypto market maker Wintermute went so far as to say that the collapse has set back adoption of crypto assets by “one or two years”.
There are some good things that have come out of the downturn, however. As The Motley Fool highlighted, it’s created “a rare buying opportunity for investors…many of the world's companies - which historically rebound much more quickly when the carnage is over - are selling at multi-year lows”.
It’s also forced brokers and trading companies to reconsider how they source and work with providers to help mitigate risk. Let’s face it, no one wants to be the next FTX horror story. I believe that this new approach will influence many of the trends that we are likely to see in the trading ecosystem in 2023. I predict that four of these trends will stand out:
Traditionally, when a new retail brokerage was just starting out and choosing which trading platform to use, there was one platform that was the automatic go-to. In fact, very little discussion took place around platform selection at all.
All that has changed. Today, it’s in the brokerages’ interest to offer more than one trading platform for their customers, for two reasons:
The first is that it means they can offer their customers more options for where and how to trade. A key differentiator to help them stand out in a relatively saturated market.
The second is that it is a far more resilient approach. By having more than one trading platform, brokerages are naturally introducing greater redundancy to their offering by not just relying on one platform.
I predict, therefore, that in the next year we will see brokerages expand from just one platform offering to two or three. I also believe we’ll see larger brokerages developing their own in-house platforms so that they don’t have to rely on anyone but themselves for ultimate redundancy.
In a similar vein to my previous point, redundancy to help limit the risks associated with political and economic shifts will be crucial for trading platforms in 2023. Both from a reputational standpoint and also to win back confidence in cryptocurrencies.
Take hedge fund Galois Capital as an example. In a letter to investors, it admitted that is still has half of its capital stuck on FTX – that’s around $100 million it cannot access.
It must become normal practice for trading companies to use multiple crypto exchanges to connect to and trade with. Arguably, for many trading companies, this is already happening. However, I see 2023 as the year that almost all will be looking at their allocated funds and diversifying the crypto exchanges that they use to trade with as much as possible, regardless of how large the exchange is.
The likes of Binance and Coinbase have dominated the world of retail crypto exchange for years, making it so they offer complete fairness between retail and institutional customers. Making any headway into taking market share away from these two is going to be nigh on impossible.
The traditional finance space is different however and offers crypto exchanges a real opportunity to expand their reach into an area of finance that wants to diversify its positions and offerings in line with consumer demand. So rather than targeting retail customers, I see crypto exchanges increasingly going after the likes of hedge funds and brokers in TradFi to offer their services.
It’s also an opportunity for smaller exchanges to be more attractive to institutions by having their matching engines located in the same datacentres as where most TradFi infrastructure already exists, thereby creating a lower latency offering.
During the pandemic many of us found ourselves homebound with cash to spare, looking for ways to make that money work harder by trying our hand at trading. Now a few years on and the boom in retail investing continues to grow. Retail investors were among those who saw tumbling bond prices as an opportunity to buy more and diversify their portfolios.
This growth has been helped along by the rise in low-cost brokerage platforms and the introduction of fractional shares trading.
And banks - specifically neobanks - want a piece of the action. In keeping with their ability to be far more innovative than their traditional counterparts, neobanks have identified trading as an opportunity to diversify their income streams and become an increasingly one-stop-financial-shop for consumers.
I believe that in 2023 we will see more neobanks invest in automated trading in particular, as it provides a great entry into trading for novice traders. I also think 2023 will see more banks working with companies such as Bitpanda - a mobile-based trading platform that offers its tech infrastructure as a white label solution - to badge their own trading experience.
As much as I would like to predict that this year will be a more stable one for the trading world, the industry remains up against rising interest rates, elevated inflation and slowing economic growth. The trends I’ve mentioned above, diversifying providers, portfolios and services, will be crucial in mitigating the risk the trading industry faces.
I’d love to discuss the topic of resilience and diversification more so if you’re interested please get in touch.
Trading expert Mike works with customers not just as a hosting provider but a partner to ensure their infrastructure enables future growth. A golf newbie, he's regularly one shot away from selling his clubs.
There are very few industries that haven’t made the move to the cloud over the last decade. The financial industry is one of the outliers that retains at least one foot, if not both feet, within dedicated infrastructure.