February 05 2021

The Next Winning Trade

The rags-to-riches stories about retail investors betting on GameStop are just the tip of the Iceberg. A bigger and more lucrative trade is at play underneath the surface: technology in global markets.

Let’s break it down in three pieces. First, bringing more efficient products at lower costs to investors. This has been the object of fractional shares, mutual funds then ETFs, and zero-cost trading on a large variety of tradeable instruments. New players like Robinhood, ready to sacrifice profits on the altar of growth, made life difficult for asset managers, forcing a run for scale and looking for more lucrative trades.

This brings us to our second point, where is the money really made then? Well, in the trading functions underpinning the formidable rise of new retail trading. Institutions no longer trade stocks but bundle them into stock pools to serve ETF rebalancing. Brokers or liquidity providers use technology to execute transactions faster and at larger scale, such as Jane Street of Citadel. Making a few bps on high-frequency trading proves a windfall.

Thirdly, and more in depth, the new frontier is to improve the cogs of the financial machinery. More rapid settlements make money flow not only quicker, but also with less systemic risk. On this, decentralized finance may have a leading advantage. While bringing more trustworthy governance into the mix, it reinvents payments (Flexa), derivatives (Synthetix, Nexus Mutual), and lending (Compound, Aave, Maker).

Why does it grow so fast? Aave, which is schematically a money market protocol on-chain, grew its pool of assets by 5x in a few months to $5bn. Nothing short of stunning. This rapid increase is linked to “staking”, which entices participants to pledge their crypto assets against a reward in the form of an interest rate. In turn, the assets are lent out to other participants mostly to fuel market volumes. This is money market re-invented, only faster, with better governance, and lower costs.

The next winning trade might just be the one that empowers you the most.

360 Advisory – Markets