It goes without saying but in recent years, many things around us have become driven by computers. The world of trading is no different – once reliant on traders to place their trades, we now have computers that conduct up to 70% of trading volume on the NYSE. In fact, when I last visited the NYSE in 2011, the building was eerily quiet and it appeared like any other regular office building. There was none of the excitement seen in movies where traders are scrambling to place their orders – it didn’t even feel as though I was in a trading environment – there was however, rows of computers everywhere.
With the trend established for humans to design the trading strategy and let computers execute the order, companies are looking for new ways to establish a competitive advantage. With that, we have the development of the Artificial Intelligence (AI) Hedge Fund, a more advanced way Hedge Funds are allowing computers to dictate the strategy and trade by way of ‘knowledge’ accumulation – all data points relating to instruments, the market and the economy are assessed by computers which work together to make a forecast, identify longer-term trades, choose how to proceed, and adjust autonomously to any variations within the market. Subsequent results then become part of a knowledge base, allowing the system to continually learn and recognize or anticipate events.
With up to 1360 funds relying on quantitative models, numerous hedge funds have seen the merits on offer in transferring to a more agile system that responds to the market, and which continues to learn – only improving the chances of success for the next trade. This type of AI is not new to the world, used to varying degrees of success by the likes of Apple and Google in their phones. With traders always on the lookout for trading methods that provide a superior advantage, like with phones, whether AI systems become sustainable is another matter as uptake increases and their differentiation diminishes.