The ongoing investigation into the US flash crash has this week got the online financial news community talking about the upsurge in automated trading platforms, and other, more advanced forms of artificial intelligence (AI) penetrating financial services. Do the pros outweigh the cons?
Of course, the flash crash is an example of how things can go wrong when using AI in business, but, as Zoe Kleinman writing for the BBC News
website found out, it can offer significant operational benefits: “High-frequency financial trader Virtu, an electronic trader with computerised strategies, has only ever recorded one day of losses in nearly six years.”
Dr Juan Pablo Pardo-Guerra, Assistant Professor at the London School of Economics, said: “If we were handling the same volumes of stocks with human traders it would probably be a much more volatile existence.”
But Kleinman also questioned whether the increased use of algorithms in finance will make business "boring". Dr Pardo-Guerra answered: “The trading floor was a very exciting place. Now it's more like a software company than a financial organisation.”
Then there is the question of whether such platforms will replace the need for human traders. “Some aspects [of business] can be automated, [like] calculated or quantitative decision making,” said Dr Pardo-Guerra. “But others rely more on personal cues and networks … something algorithms can't do.”
For now at least, this suggests that the presence of people in trading is still essential. BBC News story 40%
The proportion of new hedge funds that were ‘systematic’ last year (source: Preqin) Self-teaching software
Georgia McCafferty takes a different view. She wrote in an article for digital finance news site Quartz
: “Financial traders may not be the first people Elon Musk, Bill Gates and Stephen Hawking
were thinking of when they expressed their recent concerns about AI’s threat to the human race. But if companies like Aidyia succeed, the human trading profession could well be one of its first casualties.”
Aidyia, we learn, is a technology company manufacturing intelligent software that can teach itself to adapt to fluctuating markets, without instruction from humans.
McCafferty explained how AI systems like Aidyia’s are far more advanced than the algorithmic programs that have been in use since the 1980s: “Humans develop the initial software, but the AI itself develops the model and changes it over time.”
Last year more than 40% of new hedge funds were ‘systematic’. With AI technology advancing all the time, perhaps a humanless trading floor is not too far off becoming a reality. Quartz article Ecommerce and AI: A match made in tech-heaven?
It is not just the trading sector that has capitalised on technology once restricted to science fiction. Deepali Gupta wrote in an article for the Economic Times
that ecommerce is increasingly using AI to predict consumers’ footsteps, and investors are interested.
“As the ecommerce space gets saturated, investors sniffing out the innovative use of technology are zeroing in on companies developing AI solutions,” Gupta wrote.
Amit Khanna, partner and head of analytics at KPMG India explained: “You can have a machine that is learning and find an AI solution for most business problems.“
However, Gupta wrote that while there is ample investor appetite in this space, venture capitalists currently have little knowledge of the area. Investment, she predicts, will therefore take time. Economic Times comment
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