Sometime last year, Bloomberg Businessweek had one of the most interesting stories ever. The report covered Renaissance Technologies, one of the most secretive yet most successful hedge funds having returned $55 Billion in profit over 28 years. To put this in context, Kenya’s GDP is roughly $60 Billion so folks this is a shitload of money we are talking about. Lots and lots of it.
My main interest in the story stemmed from the realization that Renaissance has for all this time been a quant.
quant — A quantitative analyst or, in financial jargon, a quant is a person who specializes in the application of mathematical and statistical methods — such as numerical or quantitative techniques — to financial and risk management problems.
Quants have become the in thing on Wallstreet and the financial world in general, where algorithms have sort of replaced the math and statistics bit and are being used to predict events in the financial markets. As computers compute quicker, have no emotions and can generally execute trades faster, everyone from prop shops to the big boys is hiring programmers to create these algorithms.
Upon finishing the article, I forwarded it to my friends Calvin, Wiza and Ian who happen to be great programmers. I am a lousy coder but have a pretty good understanding of the financial markets and we thought we can do this. The conversation never left that Telegram group and that was that.
As a regular reader of the Kenya Wallstreet (we are very lucky to have a journalist with extreme panache on matters finance) the reports carried regarding our stock market have been worrying. This report stated that the NSE’s HY (the listed company) profits plunged 54%. This report on the other hand states that the NSE 20 Share Index has been on a downward trend. Other reports state that brokers and investment bankers are no longer making as much. Rightfully, we can argue that its an election year, there is a drought and even blame the guy who shot 2pac for all we care but at the core, we know INNOVATION is a problem.
I am not sure Kenyan brokerage and investment banks as well as the Nairobi Securities Exchange realize the changes happening around them. In 2016, major banks from Credit Suisse to Goldmann Sachs began to focus more on technology as their next fuel. Locally, the discussion still lingers around how many IPOs we had in 2016. I mean. Really?
Innovation is a buzz word often thrown around but hear me out. Firstly, these guys need to innovate on product. Over half a century since the Kenyan stock market was founded, the only asset classes available to an investor are Equities and Debt. Most investors will often shy away from bonds owing to the high minimum amount requirements and opt for the Equities way. Even so, there is not as much liquidity from Equities meaning investors will either hold onto their positions and wait for dividends or just hope and pray that good times will come when the stock rallies and they can cash-out.
About 4 years ago, there was talk of the establishment of a futures market but that is yet to come to action. The exchange needs to give us something new be it futures or ETFs. This may require a major campaign to educate investors on the possibilities presented by the same but we seriously need it. I think its upon both the NSE and brokers to work on the modalities and reignite interest. I am still wary that even the introduction of these asset classes, investors will fail to take advantage. I mean look at GEMS (the stock market for small businesses in a nutshell). Is anything going on that side of the market?
Innovation RE: Technology also needs to happen NOW. Last year, there was excitement in market over the planned launch of the M-Akiba bond. The bond would allow investors to buy the bond via mobile devices and settle the same via mobile money services. This has been postponed for different reasons with the latest being that the cost involved will diminish investor earnings (partly due to high cost of mobile money services).
Thing about technology is that it dramatically lowers the barrier of entry for individuals interested in the stock market. Anyone from whichever part can get involved. There are a few local brokers who have created portals allowing investors to trade securities for themselves but the user experience will kill you. Beyond that, everyone needs to get their act together.
Secondly, these organizations should view technology as their next source of revenue. How exactly? DATA. The capabilities presented by big data and analytics are immense. Take for instance the brokerage firms conducting thousands of transactions on a weekly basis. I am not sure they do much crunching beyond this but this presents them with an opportunity to analyze patterns and behavior of transactions. These patterns will then feed into a larger picture on investor actions. If they have a prop desk, these patterns present an opportunity to monetize this data either by making trades or selling the same data. The brokers should also think about going the quant way. You have the data, and can hire the programmers so why not?
Back to the bourse, the NSE on the other hand needs to relax on the regulations. I think a regulator is important for standardization and elimination of unfairness but in this case, it feels like the regulator has actually locked investors from the market by making it so complex and boring.
Easy way out? TECHNOLOGY!