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The Impact of Artificial Intelligence on Investment Management

 4 min read / 

The stock market is becoming increasingly hard to predict given the elevated levels of volatility. In July last year, the CBOE Volatility Index hit a record low when it fell below 9.50 basis points. However, this year, it jumped to over 37 points before dropping back to the current level of 19 points during which stock prices have rallied and plunged unexpectedly.

Some analysts have suggested that what we are witnessing is a market correction, while others have attributed the recent swing in stock prices to the growing impact of the cryptocurrency market on other markets. Both schools of thought certainly have a point, but for the ordinary investor, things cannot get worse.

At the current volatility levels, it is almost impossible to make informed judgment calls on the market. However, advances in technology could lend a helping hand to the desperate traders as they strive to net profits against the odds.

AI-Based Robo-Advisors and Trading Systems Could Help

Over the last few years, Robo-Advisors have gained popularity in the investment management community as more fund managers and even individual investors continue to incorporate them into their investment strategies.

One of the main drivers of the increased usage of Robo-Advisors in investment management is machine learning. This field of computer science has grown in bounds over the last decade and is now having a significant impact on financial markets. Machine learning provides computers with the ability to learn without being actively programmed.

Its widescale adoption has been boosted by the growth of high-frequency trading in place of exchange-based trading. Hedge fund managers and software developers have teamed up to create trading robots that will execute trades on their behalf. Even the largest players have embraced this trend with the likes of JPMorgan Chase & Co. leading the race.

Big Banks and Hedge Funds Lead the Way

Last year, JPMorgan revealed that they were developing an AI-based trading system to automate their equities trading activities. The system, dubbed LOXM, launched early last year in Europe with Asia and the US following later.

LOXM’s main task is to execute client orders at top speed and at the best price possible arrived at. It does this by using experience gained from executing billions of past trades (real and simulated) and is also able to tackle the huge problem of moving big equity stakes without upsetting market prices, the Financial Times reported.

This system will help traders to predict trades more accurately and without the burden of emotional trading. However, developing these AI-based trading systems or Robo-Advisors is not easy. Companies like JPMorgan have had to team up with a software development startup, Mosaic Smart Data, to implement AI-based trading.

Therefore, this makes it a lot more difficult for smaller players and independent financial advisors like IFA London to compete on the same level. According to reports, the inability of smaller players in the market to come up with systems of the same quality as the one used by JPMorgan could be what slows down the adoption rate of AI-based trading systems.

While clients would be happy to switch their investment portfolios to AI-based trading and Robo-Advisors, they would prefer to do so when the system is up to the required standards. There are several fake products swarming in the market and investors would prefer to avoid those at all costs.

Nonetheless, this has not stopped aggressive startups from taking the bull by its horns. For instance, Babak Hodjat, the man who helped lay the groundwork for Apple’s Siri, is determined to take on Wall Street with his 100% AI-run hedge funds. Speaking to Bloomberg early last year, Hodjat said that he has been running his startup for over a decade under the radar developing his AI-system, which he said can read and understand billions of pieces of data, including spotting trends.

Clearly, there are more just like Hodjat out there. They are setting the pace for everyone looking to launch a similar product in the market and the stakes are being raised. Eventually, nearly all investment management firms will have their own AI-based trading system. And where does that leave the retail investor? Chances are that we will see more independent investment advisors pooling their resources together to stand a chance of competing with the elite.

Conclusion

Reports already indicate that quant funds have been among the best performing investment management firms, according to a 2016 report published by Business Insider. Things have since evolved a little bit to incorporate AI-based trading systems, which are helping investors net better profits from high-frequency trading.

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