Who Benefits from Innovations in Financial Technology?
77 Pages Posted: 4 Nov 2019 Last revised: 19 Nov 2019
Date Written: April 1, 2018
Financial technology affects both efficiency and equity in the stock market. The impact is non-trivial because several key technological developments have altered multiple dimensions of investors' opportunity sets at the same time. For example, better and faster computing has made it cheaper for retail investors to participate and to find funds that meet their needs. However, it has also made it cheaper for sophisticated investors to learn about asset returns. Some experts believe these innovations will increase financial inclusion. Others worry about possible anti-competitive effects that can lead to more unequal rent distribution. To address this debate, I first build a theoretical model of intermediated trading under asymmetric information that allows me to differentiate between the effects of each innovation. Second, I interpret US macro data from the last 40 years through the lens of my model and find that, although the gains from financial technology were accruing to low-wealth investors throughout the 1990s, they have been accruing to high-wealth investors since the early 2000s. The key theoretical finding is that, even if investors have access to the equity premium through cheap funds, improvements in financial technology disproportionately benefit informed, sophisticated traders. This reduces the participation rate of low-wealth investors, improves price informativeness, enlarges (but, at the same time, consolidates) the sophisticated asset management industry, and amplifies capital income inequality. Further advances in modern computing, big data, and artificial intelligence in asset management, in the absence of any gains redistribution, may accelerate the rate of change.
Keywords: Financial technology, stock market, investment management, information, participation, inequality
JEL Classification: E21, G11, G14, L1, L15
Suggested Citation: Suggested Citation