Sergey Bolshakov | Vladislav Buchnev
The authors are the founders of the project

Tendencies and trends in global financial industry

The world is changing, and the financial and investment industry is changing with it, actively developing in several directions: the development of blockchain technologies and cryptocurrencies; development of crowdfunding and crowd investing, including Initial Coin Offering (ICO/ITO/TGE/ Token-sale); development of payment services and platforms, of financial marketplaces; development of investment technologies, including algorithmic trading and robo-advising.

The availability of financial instruments is growing, which allows any person to invest from anywhere in the world. A large part of the business is online, and offline intermediaries are replaced with appropriate software and artificial intelligence. Moreover, the entry level for buying or selling financial assets has significantly decreased. Thus, the development of the financial industry, as well as the impact of technological progress lead to the development of electronic trading.

It has been quite a long time since the first automated transaction was executed on the financial markets in the 1970s. Now algorithmic hedge funds, using computer technologies and quantitative trading strategies, have more than $ 800 billion under management, completely replacing the human factor in making investment decisions.

By mid-2016, the total amount of assets under management of algorithmic funds was $880 billion. According to the forecasts of McKinsey & Co, the total amount of assets under management of funds using automated trading systems by 2020 could reach $2.2 trillion.

Now, penetration of algorithmic trading in some financial markets reaches more than 50% of volume of all trades. In the US currency futures market, the share of trading algorithms accounts for about 80% of all transactions, and the number of transactions in the stocks futures market reaches 62%.

Despite the rapid growth of the use of quantitative methods in the US financial markets, similar dynamics are also notable in Europe and Asia.

According to the Academy of Information Technology and Engineering (Aite Group), the volume of algorithmic trading in Europe has exceeded 44%. In its turn, in the Asian market, this indicator has reached about 35% in 2016.

Trends of development cryptocurrency markets

The capitalization of Cryptocurrency market has risen to the mark of $500 billion. The number of instruments traded on crypto-exchanges has exceeded 1000. According to analysts, the total capitalization of the market will exceed $5 trillion by 2025.

New investment IT and blockchain technologies are actively developing around the world. Based on high-quality technical background, distributed teams from different countries with the participation of international experts create projects and issue tokens that attract interest and resources to a wide audience of crypto-investors all over the world.

Blockchain technology contributed to the emergence of a completely new form of financial markets and changed the role of investors in the new decentralized economy.

Since, most likely, the penetration of algorithmic trading in the cryptocurrency markets will reach values comparable to the classical financial industry, which is related to the development of the cryptoexchange infrastructure and the growing capitalization of the crypto-currency markets, institutional investors will be increasingly interested in the new perspective sector. This, in its turn, will certainly become a powerful impulse for an increase in the volume of crypto assets under management by algorithmic funds.

The «black box» problem in systematic trading

Despite the obvious advantages of using algorithmic trading strategies, their problem consists in the fact that we know very little or do not know anything about them. Who developed algorithms, what background of developer, what is logic inside the algorithm? That’s why they are often called “black boxes”. Since the first algorithms were created as an alternative to manual trading, the process did not become more transparent. In its turn, this leads to the impossibility of objective assessment risks and principles of the trading algorithm operation by the end user.

Hidden risks of this kind are primarily related to both attempts to preserve intellectual property by the developer of the trading algorithm and in the first place the advantage of the trading strategy of the algorithm over other market participants.

We see how the financial industry is changing and digitizing along with a new wave of technological transformation. But in spite of such valuable synergy of machine learning and automation of trading transactions, we can not fully solve the problems of “black boxes”.

How can blockchain help in solving the problems of the “black box”? If you can combine the advantages of algorithms with distributed registry/ledger technology, this will certainly create a more transparent investment process, which can avoid many of risks related to unpredictable behavior of trading algorithms and the distortion of the financial reporting.

The results of the algorithms can be recorded into the blockchain, which will prevent developers from falsifying the data on returns. In addition, the educational background of the algorithm developer can be recorded in the blockchain, which will help investors better understand who they trust to manage their funds and who is standing behind the particular trading algorithm, for example, information:

  • about graduated university and diploma;
  • about the additional taken training courses;
  • about passed exams;
  • about received certificates of advanced training;
  • about trading performance of algorithms created by the developer.

The technology of smart contracts also allows the relationship between the investor and the manager to be significantly simplified. Now the investor will not need to raise a substantial sum of money for investing, sign up a paper agreement and numerous annexes to it to transfer money under management. The investor will be able to invest in trading algorithms through a smart contract with established management conditions.

The following information may be reflected in the smart contract:

  • data of the algorithm developer;
  • the information of all stages of development and testing algorithm;
  • history of algorithm modification and optimization.

At the same time, the transboundariness of criptocurrency markets allow investors and managers to interact globally, and not only through a certain broker or within particular market.

The development in this direction with help of blockchain technology opens the possibility of creating an automated investment environment on which investment algorithms can be available for a wide range of investors. With the use of the blockchain, this trend will be able to create a continuous and integrated informational structure, available data of professional experience and background of developers and the effectiveness of investment algorithms they have developed.

The «survivorship bias» solution

In its turn, the access to information in the registry of blockchain on results of previously created algorithms can resolve/solve the so-called systematic error. This error also called the survivorship bias – a common problem in investment industry, when investors can only choose to invest from a group of existing investment funds, without having any information about bankrupt funds.

But if we are talking about trading algorithms, then the situation is similar to the choice of investment funds. Therefore, the storage of data on all previously existed and bankrupt algorithms in the blockchain registry can allow this systematic error to be solved.

In this case, investors will be able to reveal the typical properties of previously unprofitable trading algorithms, which are also inherent to profitable ones in the blockchain ecosystem, and avoid to invest in them. Thus, the discovered patterns of unprofitable strategies can be identified, as well as those whose properties led to losses. This is a very weighty advantage of using blockchain to monitor quantitative trading strategies.

In the context of using the blockchain, there is the possibility of full verification of results and performance of algorithms, fixing of significant events, the formation of educational and professional background of quants-developers, providing the possibility of keeping intellectual property of algorithm developer, as well as creating transboundariness of relationships between developers and investors all across the globe.

The model of ecosystem may be as following:

Transparency of the blockchain provides a completely new perspective on the use of trading algorithms. The potential for the development of such investment decisions undoubtedly contributes to the formation of trust among the participants in the ecosystem.

Considering the blockchain as an effective technology that provides opportunities for creating a new generation of financial services with reliable support for the established standards for the development of investment industry, for the first time we have the opportunity to see absolutely new standards in conditions of complete lack of trust between the participants of the system. Of course, we should distinguish the attempts to invent a new economy without trust and a new convenient technology and understand that the blockchain is not necessarily an environment where everyone does not trust each
other in the same way.

Adaptation is a matter of time

Considering the rapid adaptation of the traditional fiat markets to new cryptocurrency instruments (in particular, the launch of futures for bitcoin in Chicago on CBOE and CME), it is possible to predict that algorithmic trading prevailing in traditional markets will quickly take the lead on crypto currency market as well. Even now at Bitkointalk forum and other resources, there are many offers on crypto-trading through Trading Bots (trading algorithms), and they are only “first fruit” from private traders and small teams. Obviously, the major players will soon pull themselves together too.

Since the crypto industry is only getting on its feet, at the moment it is difficult to find comprehensive information about the status of its development and the specific share of algorithmic trading in the market of crypto assets. But we can note a number of projects that managed to attract millions of dollars through the ICO (Initial Coin Ofering). According to information from open sources, for example, Coindash, which offers the possibility of social trading on Cryptocurrency markets, was able to raise about $12 million. Cindicator, oriented to forecasting financial events with the help of hybrid intelligence, held an ICO to the amount of $15 million, and Numerai issued the tokens of its project without conducting an ICO, thus confirming the need for integration with the blockchain technology.

Also, speaking about the prospects of creating marketplaces and “crowdsourcing” funds for algorithms, we can say that in the fiat market there are several successful players who have successfully raised millions and even tens of millions of dollars of venture investments. On cryptocurrency markets, there are only few marketplaces of trading algorithms yet and one of them plans to become, combining an experienced team and advisors.

Hunting for talents

What if we help talented people around the world, those who love and good at math, statistics, programming, machine learning and can work with large data, learn how to develop quantitative trading algorithms? What if we will help talented developers with mentorship support and provide them with the necessary information and infrastructure?

Then such talents will find a benefit for themselves and will have a significant impact on the development of the investment industry in decentralized economy, as well as receiving a considerable and fair reward for their competence and experience.

The advantages of blockchain will allow the investment industry to be transformed, opening unprecedented opportunities for better change. And the only way to take advantage of global transformation is to start transforming them into practice.


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