Equity markets are experiencing a structural change caused by technological innovation, changes to investor behavior and global structural shifts. Each aspect of the market is changing, from automated trading and the rise of passive investing, to the broader influence of exchanges in the Asia-Pacific region to new regulatory oversight.

Over the next decade, investors will need to be quick and nimble as they adapt to a complex new landscape. Technology will allow for greater access and efficiency in some cases, yet there will also be additional risks. Similarly, new regulations could change the way trading occurs and how different participants interact with one another.

Staying agile will be critical as conditions continue to change. The rate of change is accelerating and those who can interpret change, while acting with discipline, will find the greatest opportunities. Equity markets will not be defined by any single change but rather the adjustments by investors, institutions, and regulators, and the continuing evolution of global market integration.

Here are four major trends investors need to understand in order to gauge where markets are headed and how to profit from the changes:

1. Technological disruption and market access

Technological advancements have significantly changed the structure and operations of equity markets. Algorithmic trading and high-frequency trading (HFT) have grown dominant in the equity markets over the last decade, especially among institutional investors.

These strategies have developed to exploit many inefficiencies in equity markets, risk management, provisioning liquidity, etc. Additionally, AI-driven analytics are increasingly being employed to explore larger datasets, predict prices in the short term and drive decisions formerly made by portfolio managers.

New developments like commission-free trading, fractional shares and mobile trading platforms have lowered the barrier to participatory equity trading for retail investors. Consequently, with opportunities for more broad participation, many more retail investors, especially younger investors, see real-time management of their portfolios as part of their everyday routines.

Nevertheless, the transition to automation carries risks. Whereas algorithms amplify volatility through asynchronous trading, persistently correlated and systemic with respect to observed signals, the utilization of AI in developing trading decisions raises questions about the transparency of the decision-making process and the ability to explain or audit the automated decisions.

2. The rise of passive investing and index dominance

The shift from active to passive investing over the last 10 years has been pronounced and has shifted the nature of how equity markets operate. In terms of assets under management globally, low-fee and low-cost index funds and exchange traded funds (ETFs) hold significant assets. Investors choose them because they are simple, low-cost and provide market matching returns.

As capital has flowed into index-tracking products, a feedback mechanism has started, wherein large-cap stocks — especially ones that are meaningfully weighted in these indices — tend to receive more inflows, regardless of company-specific fundamentals.

Passive strategies will likely remain the market preference, particularly among retail investors who might be more accustomed to using credit cards, but are looking for efficient, general exposure.

That said, periods of greater volatility, or divergence in sector performance, may cause investors to explore the flexibility of active strategies. While a sharp reversal likely will not occur, it is possible to see a recalibration of the active/passive dynamic over the next decade, especially in segments of the market that are less researched or inefficient.

3. Globalization, geopolitical tensions and market integration

Supply chain shocks like those witnessed during the Covid-19 pandemic and more recently in semiconductor and energy markets, have revealed vulnerabilities of global capital markets and the interconnectedness in the global economy. Investors and firms react to supply chain shock not only as they impact corporate earnings directly, but as investors look to manage their investment exposures, investment sentiment shifts and capital allocation patterns change.

In the wake of such uncertainty, some firms and governments have begun to pursue regionalization of supply chains or a “friend-shoring” of investment exposure to mitigate political risk. These strategies could ultimately modestly disrupt the flow of capital across world economies.

Meanwhile, new regional power centers are also emerging. The Asia-Pacific exchanges — and particularly the exchanges based in China and India — are rising in volume of trading, number of listings and interest from investors. Both region’s capital markets are maturing and, with improved access to foreign investments, each region is set to take on a larger role in the global equity market.

This change in the environment may lead to both new wealth creation opportunities, and risks, as investors will need to consider not only sectors and fundamentals at company levels, but geography and macro level compatibility.

4. Regulation, market transparency and retail participation

Over the last year, regulatory changes have been central to the development of equity markets, particularly in light of the retail trading surge of 2020 – 2021.  One area specifically being scrutinized is payment for order flow (PFOF), a practice that occurs when a broker, in exchange for “consideration,” routes customer orders to market makers.

The proponents of PFOF argue it allows for commission-free trading, while opponents of PFOF question the quality of order execution and whether clients are aware of any lack of transparency. The U.S. Securities and Exchange Commission (SEC) proposed reforms to give price competition and displace PFOF and in general, the nature of this regulation moves toward rules that have an investor advantage.

Wider changes in market structure, such as consolidated audit trails and increased reporting requirements, are also encouraging platforms and intermediaries to step up their accountability. Firms are providing greater scrutiny as technology allows for faster execution and more complex strategies, and regulation is adapting to maintain fair processes and reduce the risks to the system.

Retail participation is still structurally higher than previous decades, even if it is off its peak from 2021. Platforms are proactively providing investor education tools, enhanced risk disclosures and more protections for end users in response. These developments show a maturing of segment retail away from short speculative bursts and into a period of more informed engagement.