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The Rise of AI & the Potential Impact on Global Financial Markets

AI is slowly starting to create an impact across all sectors and the world of global markets is also starting to feel it. AI ETFs have become very popular, and investors are increasing their exposure towards AI as an industry and deals for AI startup companies are on the rise.

The evolution available now is not achieved in a day. A decade of effort into AI/ML systems has made this possible, which seemed impossible or at least passionate earlier. The mathematics, statistics, and decision theory infused into this facilitate learning, enabling them to modify and deliver more profound decision-making. The advances in ML and deep learning algorithms shaped the way of trading with AI-infused technology.

A recent survey of financial institutions (WEF 2020) has received a 77% vote implicating that AI will turn favorable for their business. As per estimation by McKinsey (2020a), the potential value of AI in the banking sector will reach around $1 trillion. The use of fintech has shown considerable growth in the companies that have employed them.

This growth in AI has enabled financial companies to access vast amounts of data, including market data, economic data, news, and social media data. With AIs, traders can have a better decision-making process and respond rationally to market changes.

Different Types of AI in Trading

Types of AI

Following are different types of AI trading: –

  • Algorithmic Trading: Algorithmic trading refers to employing algorithms to perform certain trading functions. It enables traders to execute trades automatically on predefined rules and parameters. These can process and analyze a vast amount of data in less time and help the trader make reasonable speculation. Institutional investors employ the same for a more efficient and accurate trading mode.
  • Predictive Trading: It involves using ML algorithms and AI that use available historical data and real-time market information to predict market outcomes rationally.
  • High-Frequency Trading: To execute trades at high speed and volume, AI and advanced computer algorithms are more effective and accurate. The advancements infused in their system enable them to process a vast amount of data and execute trades in milliseconds. It enables traders to have an absolute advantage of available opportunities. Most institutional investors use this trading format to capitalize their funds to be in a lucrative position.

Uses of AI in Trading

These are some of the common applications of AIs used in trading: –

  • Forecasting: AIs infused in trading systems enable traders to anticipate more accurately through market data and economic indicators. Traditional statistical and econometric models lack the flexibility that AIs offer a trader. These can identify hard-to-detect relationships between variables and connect the dots more accurately to make sensible conjunctions. ML methods trespass linear regression-based methods’ performance, accuracy, and robustness. These can make the best possible use of structured and unstructured data.
  • Investment Management Industry: Due to the integration of AIs and ML investment management industry can process sustained data and information in a streamlined fashion. These also allow the industry to facilitate traders with a more profound client interface with ease of operation and advancements.
  • Risk Management: AIs are used to analyze market data and identify potential risks in real-time. Traders have a more profound decision-making process and can manage their portfolios in a polished demeanor. It increases the chances of having a successful trading strategy and allows traders to manage the associated market risk in an upgraded protocol.

AI Fund Managers

AI Fund Manager

AI Fund managers have been around for longer than you can imagine. One of the most popular AI Fund Managers is AIEQ which utilizes IBM Watson, and it can equal the work done by a team of 1000 research analysts, traders and Quants working round the clock. It was founded in 2017 and has been picking stocks consistently for investors ever since. If you are worried that this could take your job away as a trader/fund manager, I have some good news for you. The fund’s performance over a 5-year period is a mere 4.79% vs. the S&P 500’s performance of 51.80% for the same period. It just shows how difficult it is to pick stocks and make money in the stock market. Before we get ahead of ourselves, we need to understand that AI is improving every day, and someone is going to figure out a way soon to accurately pick stocks and generate using AI.

On the other hand, AI themed ETFs are gaining momentum and are a popular choice among investors today. Most investors will have some exposure in AI related stocks by the end of 2023.

Concluding Remarks

AI has empowered traders and investors with its distinct features and has provided them with a more elevated decorum to trade in the market. AI is the future of trading and will reshape the global financial market over the next decade.