June 24, 2020
Nothing herein is financial advice. Everything herein is purely informational. Nothing is a recommendation to buy, sell, trade, or own securities. Please consult a licensed professional before trading or investing.
At Spawner our team of traders gets emails and LinkedIn messages consistently about how to get started with trading or investing. The inquirer typically states they have little to no knowledge of markets, finance, or anything else directly applicable. My consistent advice before starting Spawner was “I’m not a licensed professional so don’t have advice to give. Find a professional.” That’s still my advice, but the average inquirer has no interest in this. Here’s the story of what we’ve built to help millions of traders start to balance a game of massive imbalance in knowledge, information, data, and tooling.
The markets are all about asymmetric knowledge and information. There is a whole spectrum of sophistication. Those with relative sophistication have access to knowledge, information, and tooling that far outweighs the opposite end of the spectrum. Those without training, knowledge, or experience are showing up at the markets and entering the door to a casino that is happily waiting to take their money. And over time the User Experience (UX) to get you from entering your bank details to placing a trade has gotten easier and easier. We’re at a point where they’re even handing you free shares when you make your account.
Betterment, Wealthfront, and a whole host of other investing apps and robo advisors looked to solve these problems by building apps that take the reigns and grow your wealth through passive investing, thematic investing, or whatever their favored approach. I’m all for it and the Assets Under Management (AUM) shows a clear trend towards more and more people signing up and letting a passive approach take the reigns.
But there’s a bigger trend bubbling. And that trend is the continued growth of commission-free brokerages, social investing platforms, and other apps that are growing at an unprecedented pace with plenty of Venture Capital (VC) money piling in to support them. Many have user bases in the thousands and millions of users. They’ve got billions of dollars getting traded, much of which is likely by the same people who email folks like me asking how to get started trading or investing.
And so the cycle continues where traders give their money to the sharks. And I feel obligated to draw on Rounders for this part:
“If you can’t spot the sucker in the first half hour at the table, then you ARE the sucker.”
And no doubt the sucker they are indeed. Many of us without formal training and years of practical experience on a trading desk have been that sucker.
Many agree that the best way to learn is through trying and failing. I certainly agree that this might be one of the fastest ways to learn. But the best way to learn? Should we really donate money to the sharks in order to get a seat at the table.
Imagine a world where surgeons learn through trial and error. They kill a few patients, but at least by surgery 5 they know what they’re doing. Right? I see trading in a similar light. If you walk on the trading floor with little to no knowledge, expect that dead patient to quickly be your brokerage account.
And we’ll continue to have trader after trader go through their rite of passage into the wide world of trading. Some will get lucky and make a few bucks early on. They’ll become traders for life and spend the majority of their time underperforming major benchmarks. Others will fail, lose their bankroll, and get discouraged. And a final group will fail, get back on their feet, fail again, and figure it out over a long period of years that lead them to studying, learning, and understanding that becoming a shark requires tons of investment — both time and money. And time is money.
And so that’s why we’ve spent so many hours building Spawner. We’ll continue to have thousands and thousands of people enter trading, exit trading, and enter again, year over year. That steady flow of emails asking how to trade or invest is the life-blood for Spawner. That’s where we got the inspiration to build a product that really is focused on working to level the playing field.
Regardless of your perceived knowledge, the markets are spooky and there’s consistently asymmetric access to knowledge, information, data, and tooling between market participants. We started our journey down Spawner lane by figuring out some of the key areas we could create technology to better equip users.
And we didn’t want to turn this into an education platform (though such a platform would be awesome). Ultimately, it started by creating a crude trading platform that my friends and I would want to use. I wanted it to be a place that we would all go every day to allocate, diversify, and research, with access to state-of-the-art tooling and embedded knowledge-sharing.
Guard rails are something I’ve felt I’ve never had. I’ve always wanted guard rails against my overwhelming stupidity and lack of control. Despite the relative sophistication some of my strategies may possess, I’m still tempted to break rules I’ve set for myself and allocate in ways that violate my own appetite for risk. This is the mark of a novice trader.
I’m consistently swayed by stupid news feeds and word of mouth. So the first tool we built for Spawner were guard rails that would just give me a simple warning/confirmation before I pulled the trigger. Very simple and effective to make sure I was allocating in a responsible manner.
This pop-up box gave me basic information about my trade that gut-checked my decision against parameters I had set for my portfolio. We calculate a few key metrics to make sure the trade isn’t completely wacky.
We start with basic metrics and exposures to determine the impact on a portfolio’s health.
That simple alert that says “hey, this will make you overweight technology and raise your volatility 6% over your threshold is more than enough for me to go, “Ah okay, let me rethink this.”
Building around a set of factors or strategies is only part of the ballgame. Optimizing and determining an optimal asset allocation is an essential practice that most novice traders either perform on instinct or neglect this action altogether.
Optimization can get incredibly complicated very quickly. So we built took the standard approaches in the literature and reapplied them for users.
Understanding the risk of your portfolio is key. But tracking this over time can be a burdon. At the core of asset management is understanding and managing risk. We could talk on for days about risk and the accompanying field and literature. Instead, we put some of the key tooling directly in the users’ hands to monitor risk and exposure of an active portfolio.
We drew upon the inspiration of learning apps to build knowledge into the platform. We realized that while we’re making lots of tooling accessible, that tooling is only as powerful as the trader or investor wielding it.
But at the same time, as a user you don’t want videos and text getting in the way of the core features. So we built it so the advanced user never has to read or hear anything about features they already intimately understand.
We racked our brains for the best way to introduce the average user to more advanced concepts. We saw portfolio building with basic factors and pre-built factor portfolios as a good start.
Building a better portfolio doesn’t stop at risk management and portfolio optimization. In fact it doesn’t even start there for most. Better trading and investing starts at accessing the data you need to navigate the markets more effectively and balance the scales. And financial data is prohibitively expensive. So we found a way to get access to high quality financial data that we could provide to our users.
But obviously just dumping data on a user isn’t that simple.
Stopping at dumping a pile of data on our users wouldn’t be very valuable. We’re Data Scientists and Machine Learning Engineers at our core and so found a way to build Natural Language Processing (NLP) into the core of our platform. This way users can sift through their pile of data with simple plain English questions.