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FinTech

Paper Session

Friday, Jan. 5, 2018 2:30 PM - 4:30 PM

Loews Philadelphia, Commonwealth Hall A1
Hosted By: American Finance Association
  • Chair: Bruce Carlin, University of California-Los Angeles

FinTechs and the Market for Financial Analysis

Jillian Grennan
,
Duke University
Roni Michaely
,
Cornell University

Abstract

Does technology remedy the information inundation problem investors face or make it worst? By changing how investors discover information, FinTechs that streamline and synthesize all available information could serve to level the playing field if it is easier to find the best investment advice. Or, if investors rely on aggregated signals only, FinTechs could change the incentives of those producing information, and thereby, its quality. By gathering novel data on FinTechs, financial analysis online, and investors' internet clicks, we demonstrate FinTechs are counterproductive to the underlying goal of market efficiency. Supporting this conclusion, we show that in response to FinTech entry: (i) investors rely more on aggregate signals; (ii) traditional information-producers such as sell-side analysts reduce the quality of their reports; (iii) this change in information production stems from both an intensive and extensive margin; and (iv) price informativeness does not improve for equities that FinTechs focus on.

The Impact of Internet Postings on Individual Investors

Manuel Ammann
,
University of St. Gallen
Nic Schaub
,
University of St. Gallen

Abstract

Many people share investment ideas online. This study investigates how investment-related Internet postings influence the behavior of those who read them. We use unique data from a social trading platform that allow us to observe the trading behavior of those who post comments – the traders – as well as the trading behavior of those who potentially act on comments – the followers. There is strong evidence that comments encourage followers to replicate investment decisions of traders. However, postings do not contain value-relevant information, suggesting that personal sentiment and biases drive followers’ reactions to the postings. Comments by traders who appear financially sophisticated are most influential, while followers that tend to be financially unsophisticated are most likely to trade on comments.

Long Run Growth of Financial Technology

Maryam Farboodi
,
Princeton University
Laura Veldkamp
,
New York University

Abstract

In most sectors, technological progress boosts efficiency. But financial technology and the associated data-intensive trading strategies have been blamed for market inefficiency. A key cause for concern is that better technology might induce traders to extract other's information from order flow data mining, rather than produce information themselves. Defenders of these new trading strategies argue that they provide liquidity by identifying uninformed orders and taking the other side of their trades. We adopt the lens of long-run growth to understand how improvements in financial technology shape information choices, trading strategies and market efficiency, as measured by price informativeness and market liquidity. Our findings cast doubt on common wisdom. While extracting information from order flow can improve the informativeness of prices, neither strategy markedly improves market liquidity. Thus, long-run growth of financial technology can reconcile two seemingly contradictory trends in asset markets: the increase in price informativeness and the stagnation of market liquidity.
Discussant(s)
Russell Jame
,
University of Kentucky
Zhi Da
,
University of Notre Dame
Daniel Andrei
,
University of California-Los Angeles
JEL Classifications
  • G0 - General