Move Over, Wall Street: Silicon Valley Is Invading Your Turf
If you ask most people where the greatest threat to Wall Street's nearly 100-year dominance as the world's leading financial center would come from, places like London, Zurich, Tokyo or even Beijing might be suggested. But more and more, it looks as if the threat to Manhattan's financial crown will come from right here in the USA.
Silicon Valley appears to have Wall Street in its sights, aggressively funding a new generation of tech startups whose goal is to disrupt the financial services industry and attack Wall Street with a strategy and an attitude they have never faced before.
These new fin-tech companies are younger, more flexible and -- with deep-pocketed venture capital firms backing them -- less concerned about reaching financial profitability in the near term. Unlike most venerable Wall Street companies, they are private entities that don't have to please the stock market with share prices or quarterly earnings nor support an infrastructure top-heavy with partners, associates, directors and VPs that would make Gordon Gekko cringe.
Crowdsourced Earnings Estimates
Estimize is an example of this new type of company that is putting Wall Street on notice. Founded in 2011 by former quantitative hedge fund analyst Leigh Drogen, Estimize crowdsources company earnings estimates on an open and transparent platform -- the opposite of the opaque proprietary model big Wall Street firms use -- and then makes those numbers available to the public for free.
According to multiple peer-reviewed research papers, the Estimize approach provides more representative data for earnings, which come from more than 4,000 analysts who contribute to their web-based platform. The company says this translates to earnings estimates that have proven 69 percent more accurate than traditional Wall Street analysts. Drogen says the last figure "shows that our philosophies are winning against the stale old philosophies regarding sharing of data within the financial community."
"I want Estimize to lead the change in how the financial community shares information and points the spotlight on certain individuals based on a meritocracy."
Major players in the financial research industry already recognize that change, including Bloomberg, which offers Estimize earnings estimates through its platform.
Zero Commission Stock Trades
In the brokerage space, Robinhood, which is backed by Marc Andreessen and Google Ventures, is bringing the stock market version of the Holy Grail to investors -- zero commission stock trades.
With its mobile-only platform, Robinhood allows customers to trade any amount of shares, as often as they like, for no fee. According to co-founder Vladimir Tenev, Robinhood's model doesn't depend on commissions for profitability, which should cause traditional brokers to quake in their boots. Instead Robinhood charges other companies to build upon its platform.
This means that a consumer could use a third-party mobile app like Twitter, StockTwits or Yahoo Finance and trade stocks seamlessly via Robinhood for free.
What should particularly worry Wall Street is that companies like Estimize and Robinhood don't think in traditional terms on a number of issues. For example, the first 11 hires at Robinhood were not financial advisers or brokers, but programmers, because it views itself not as a financial company, but a tech company.
This philosophy also informs the way they market their product -- forgoing a brick and mortar presence or Superbowl adds -- to reach their target audience. With just a website, a social media campaign and the buzz from tech media, Robinhood has had more than a quarter of a million people sign up for brokerage accounts.
Follow the Job Market
A key reason that tech firms are competing in the financial sector is that the 2008 crisis cut jobs on Wall Street, causing many new highly skilled college graduates to look elsewhere for employment.
%VIRTUAL-article-sponsoredlinks%One example of this comes from a recent survey by Harvard's newspaper. The Crimson found that only 31 percent of graduates were planning to pursue jobs in the financial sector, down from 2007, when the number was 47 percent.
The macro trend also bodes well for tech, as Moody's Analytics predicts that 450,000 new workers will be hired in the high-tech industry by 2015, compared to only 230,000 for finance.
It would be premature to count Wall Street out quite yet. Financial companies have faced wars, recessions, populist politicians, regulatory reforms and Occupy Wall Street, and have come out more profitable than ever. But the emphasis on product before profit, and the speed in which they can build and adapt their products to consumer needs, may give fin-tech companies the edge they need to dethrone the wolves of Wall Street.
No man is an island, or even a peninsula, so I encourage your feedback in the comments below. And don't forget to pick up my book, "Trading: The Best of the Best -- Top Trading Tips for Our Time."