Artificial Intelligence (AI) is a sector of computer science that looks to create intelligent machines that can teach themselves. AI focuses on using neural networks along with other learning methods for identifying and analyzing predictors, or features, or factors that have economic value which they use with classifiers to develop profitable models. This form of Artificial Intelligence is Machine Learning. There has been a great increase in computer power and data storage over the years that are causing a rise in these artificial intelligence systems that are meeting and exceeding human capabilities. Machine learning is already making waves in the financial services world as insurance firms, and investment banks are implementing ML-based systems to automate areas like claims processing and contract validation.
Artificial Intelligence is also impacting the application of methods for developing trading strategies in both short-term frames and for long-term investing. There are a quite a few firms that are active in this field. However, these systems are not just useful in developing trading strategies. There are other areas where AI and ML are making an impact. A couple of examples include developing liquidity searching algos and suggesting portfolios to clients. So, as these AI applications start to gain more ground, it decreases the number of human beings involved in trading and investment decisions which is also affecting the markets and price action.
Machine Learning is also set to make waves in the asset management industry. It is already planting these seeds as asset managers are seeing the ability to extract value from big data as a key differentiator. Traditional industry practices will start to struggle to stay afloat due to the growing flood of real-time data. By using ML for the analytics, it would be more solid than the conventional financial modeling, because these systems will be able to tap into the streams of “unstructured” data that social media and global digitalization creates, along with the millions of corporate press releases, conference call transcripts and other regulatory filings produced each year.
Companies like Merrill Lynch has been experimenting with an AI stock picking tool that would help to identify value in small-cap stocks that the conventional analyst may have missed. While it is possible that the use of AI by ML and other Wall Street firms will cause more efficient markets with lower volatility for longer stretches of time along followed by the occasional volatility spike, it is pretty early to estimate the overall effects that it will have on the industry.