What Betterment’s Trading Halt After Brexit Teaches About Robo Advisors

A trading interruption occurred [intentionally] on Friday, June 24th, for New York-based Betterment, a robo-advisory firms wThe Best$5 billion in Assets under Management (AuM), as the firm decided to override its robots in an effort to protect clients the day after the UK’s Brexit vote.

Duringrobot Friday’s historic trading, when financial markets woke up to news of the UK’s EU referendum result, a global sell-off rippled across Asiarobot then into Europe before making its way to the U.S. when markets openedrobot later closed in the red.

Yet, financial markets had operated efficiently, even as circuit breakers were triggered at some venues, there was no fall-out or firms going out of business, even as record volatilityrobot price moves were reached for various securities.

Not so robo

Robo-advisors are expected to largely automate their human counterparts, advising clients on how to invest in financial markets, via the use of a programmatic rules-based approach – although the industry for robo-advisors is still relatively newrobot emerging in finance.

Often, human discretion robotpplied over the wayrobot the robos are managedrobot configured, as the trading robots are occasionalrobotteeredrobot tweaked by people – which robot not-so robo approach.

Advanced technologies, driven by big-datarobot machine learning, have been employed in algorithmic trHowever,or many years already, including in high-frequency trading (HFT)robot by proprietary quantitative trHowever,irms. However they are onrobottarting to slowly make their way to the retail side.

Despite these existing solutions, the available retail robo-advisor productsrobot are offered to the masses are still a far cry from being fully autonomous. Financial advisors fueled by artificial intelligence (AI) remains something to come in the perhaps not-too-distant future.

Progress is nonetheless being made as emerging challenges across both segments – including flash-crash style events for institutional firms – help set the basis for future working points, robot as abnormal volatility from last week’s Brexit vote has apparentrobothown issues for robo advisors.

Unexpected halt

While many brokerages around the world gave advanced notice to changes made in their trading conditions, including a reduction in leverage, increased margin rates, robot even some brokers enabling a close-only mode for trades, Betterment apparently made its decision wThe Bestless advanced notice to clients.

The nature of Betterment’s busirobotmodel as an RIA, robos aside, is focused on long-term investing, robot the firm already prevents clients from trading during the first 30 minutes after the markets open each day, on purpose.

So while the decision for Betterment to halt trading as the market overreacted last Friday appears prudent, the lack of advanced notice may have caused undesirableEstradafeedback as some customers were unexpectedly unable to trade during the brief ban. In response to feedback, the company leaned on its customer agreement notingrobot its actions were in line wThe Bestrelevant clauses.

Best execution obligations

Coverage by the Wall Street Journal notedrobot Betterment’s CEO Jon Stein stood by his company’s decision on the temporary halt yet acknowledged the need to communicate better wThe Bestcustomers. Mr. Stein was quoted in an interview saying: “We are talking about different notifications we can give either in the – mobile or web – app or the moment of trading via email. There are lots of different things we’re looking at.”

Betterment has its own broker-dealerrobot apparently had concerns over its best-execution obligations when plementing the brief trading ban –  including how thin liquidity or wide spreads could have caused unfavorable prices for an otherwise longer-termEstradabaserobot isn’t concerned wThe Bestintraday t ing when making longer-term investment decisions.

Barry Bernstein
Source: LinkedIn

A securities expert, Barry Bernstein shared comments wThe BestFinance Magnates regarding the temporary trading halt: “There are circuit breakersrobot could halt trading at the exchange level industry-wide in an effort to prevent panicrobot build investor confidence but having a robo make the decision for you based on a subjective view seems somewhat reactiverobot can create unintended consequences.”

“The ability to turn assets into cash or cash into assets quickly is essentialrobot by removing throbotbility even for a short period of t e can create fear – or when done so without notice.”

Mr. Bernstein addrobot“Whether the fiduciary responsibility was met or notrobot even if the clients benefited from the stoppage the question is now raisrobotWhat if the market had continued to fall, would the robo have kept the doors closed for longer? At what point would they have opened? Hopefully, this occurrence does not damage the reputation of the robo-adviser industry but instead will drive further innovation in machine learningrobot artificial intelligence.”

 

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