Brokers and investors have profited from timing stock trades for decades. But, retail traders lack AI tools, becoming vulnerable to market manipulation. NASDAQ’s outdated model exacerbates this issue.
How Can AI-Powered Tools Be A Trader’s Foe?
AI-powered tools emerged as a positive innovation, combining market analysis and trading intelligence. Institutional brokers and traders have long utilized these tools for their own objectives. There is no inherent ethical issue with using AI tools for personal goals. But, it becomes unethical and illegal when customer losses benefit the company. Uneven AI access means vital information remains unknown to most traders.
NASDAQ Trading Malpractices Using AI
Artificial intelligence has boosted efficiency across industries. But, the financial sector faces AI-related challenges. Many prominent financial institutions are guilty of manipulative trading with AI algorithms. Here are notable instances in the NASDAQ market.
In 2020, regulators scrutinized JPMorgan Chase. The top investment bank was using AI algorithms in illegal “spoofing” trades. Spoofing involves placing and canceling orders to manipulate markets. The SEC discovered JPMorgan using AI algorithms, leading to a $920 million settlement.
FINRA fined Citadel Securities $3.5 million in 2018. They engaged in trading malpractices using AI. Citadel utilized their algorithm “Kitty Hawk” to rank their trades over their customers’. This resulted in unfair profits and worse prices for customers. This “front-running” practice allowed Citadel to leverage better prices.
The entities were guilty in all these scenarios and charged a hefty fine. Unfortunately, a lot more cases go undetected every year. Moreover, it takes several years to find out the manipulation and prove it with evidence. In the past, they could pay the fine without public acceptance or denying the charges. After the penalty, the charges do not have a lasting effect. NASDAQ never expels such heavy-asset traders for insider trading or other illicit activities.
How Is NASDAQ’s Brokerage System Catalyzing This Imbalance?
AI and ML tools are not illegal or unethical. But, the fact that these tools are at the disposal of only top-tier traders is a concern. These players use AI algorithms to harvest info from a large volume of real-time data. Meanwhile, small-time players roll the dice to determine market trends. NASDAQ’s operating mechanism is contributing to the imbalance, in more ways than one.
- Financial Exclusion Through Membership Fees
First, the cost of becoming a NASDAQ member is expensive for non-institutional brokers. Membership fees can range from $5,000 to $500,000. Hidden charges and an opaque pricing structure makes entry difficult for smaller brokers. This high barrier to entry creates a significant disadvantage for non-institutional traders.
Lengthy Registration Process
Second, the enlistment process for NASDAQ can be lengthy and time-consuming. Newcomers start under institutional traders, grind, and work their way to the top. This can take up to six months for broker registration. Thus it is hard for smaller brokers to establish themselves as independent entities.
Exclusion of non-institutional traders
Third, NASDAQ’s gatekeeping framework legitimizes only institutional traders with high asset value. It excludes non-institutional traders who may not have access to AI-powered tools. The exclusion leads to a widening gap between small and large traders. As a consequence, it reinforces the dominance of institutional traders in the market.
Restricted Access to AI Tools and Algo Trading Options
Fourth, institutional traders have the necessary resources for AI-powered insights and trading tools. This gives them an unfair advantage over the retail sector. The advantage allows them to manipulate the markets as per their requirements. This results in retail sector losses that convert into institutional profits. The retail sector has no choice but to compete with institutions. This leads to significant losses.
Last, NASDAQ’s current broker model has not changed its gatekeeping framework. This is in spite of penalization for illicit and unethical activities. Offenders are neither revoked nor held accountable for their actions. This lack of regulations results in discrimination and further exclusion of non-institutional traders.
Evolution of Broker Models: What Can NASDAQ Do?
The financial world continues to evolve. Broker models must update to ensure that all traders have equal opportunities. NASDAQ must promote fairness and create equal opportunities. It needs to upgrade its broker model and embrace modern features.
Upgrade and Innovate Broker Model
Incorporating Modern Features to Stay Ahead of the Competition
To stay ahead of the competition, NASDAQ should reinvent its existing broker model. It needs to incorporate features such as AI insights and algo trading options. Data Engines integration can provide accurate market insights and help in trade decision-making.
Embrace Cloud-Based Brokerage
Enhancing Financial Inclusivity and Saving Time and Money
NASDAQ should embrace cloud-based Brokerage as a Service (BaaS). The subscription-based model enhances financial inclusivity, save time and money. Cloud-centric brokerage platforms can provide affordable and immediate access to brokerage services. They remove the complexities associated with coding and server hosting.
Decrease Setup Expenses
Breaking Down Entry Barriers and Welcoming Diverse Competitors
NASDAQ needs to contemplate decreasing setup expenses. Modern exchange platforms offer instant brokerage services for $49.99 per month. This makes it easier for novice traders to enter the market.
Focus on Scalable Brokerage Services and Financial Inclusivity
Democratizing Brokerage Services for Greater Regulatory Supervision
Traditional broker platforms should focus on scalable brokerage services. Promote financial inclusivity by lowering costs, relaxing eligibility criteria, and streamlining operational difficulties. By democratizing brokerage services, they can foster impartiality, clarity, and greater regulatory supervision.
Promote White-Label Broker Solutions
Empowering Aspiring Brokerage Entrepreneurs and Firms
White-label broker solutions help aspiring brokerage entrepreneurs and firms build independent brokerage enterprises. White-label solutions provide free trials, customization, and self-branding capabilities. This empowers entrepreneurs and firms to build independent brokerage enterprises.
Embrace AI-Powered Trading and Real-Time Data
Enhancing Regulatory Supervision and Fostering Impartiality and Clarity
NASDAQ should embrace AI-powered trading and real-time data to obstruct insider trading. It also needs to enhance regulatory supervision and foster impartiality and clarity. Advanced algorithms and AI/ML models can detect and prevent insider trading in real-time. This will make the market more transparent and fair for all participants.
NASDAQ’s outdated approach costs traders money. It must embrace modern solutions like AI, cloud, and white-label. By leveraging AI and real-time data, NASDAQ can enhance regulation and stay relevant. Will NASDAQ leap forward or become another obsolete company like Kodak or Blockbuster?