Investment Management Using Artificial Intelligence (AI): Future of Trading

Portfolio managers make decisions on behalf of investors. Wandering over to the trading desk when they need to access the markets, where dealers will size up the incoming order and call up a reliable bank counterparty to get it done on optimum terms. Within more advanced firms, there may be none of this dialogue, like almost everything. From portfolio management to order entry and execution, done electronically. The humans who remain are merely guardians of the AI (Artificial Intelligence) machines, stepping in when markets get dicey or trades need rerouting.

Automated trading was just the first step

This is a gradual shift that has played out over recent years as automated trading has increased, leveraging Artificial intelligence (AI), and machine-learning techniques to build more intuitive systems that can make trade decisions faster than the blink of an eye. Some investment firms have embraced technology faster than others. But within the next few years, many more could find themselves moving toward the advanced end of the spectrum.

AI offers the potential to automate very low-value repetitive tasks and provide data-driven insights on liquidity and execution. All of which can be very valuable to an investment management trading desk in seeking the best possible deal for investors.

Automated trading is not new, of course. It has been on the rise among the top investment banks for many years, with significant investment in algorithmic tools that used to execute trades according to certain pre-defined criteria. Traders have found they can make cost-savings and reduce market impact in certain circumstances by using smart algorithms rather than relying on human reactions.

AI is investing’s new tech trend of choice

As in other sectors, AI can be used simply to save costs and create efficiencies or it could be used more aggressively to beat the competition. While AI might have the potential to replace human decision-making in fast-moving financial markets. It remains to be seen to what extent financial institutions are willing to hand over the reins to machines.

Artificial Intelligence used simply to save costs and create efficiencies or used more aggressively to beat the competition. The potential for machine-based decision-making on the trading desk now widely accepted. But some believe the investment management function may be the next frontier.

How Artificial Intelligence can drive investment management

Bringing AI to investment management would seem to be a natural progression, however. Automation began originally at the stock exchanges where technology was first used to match buyers and sellers. And after that, it extended gradually to banks with the development of automated trading strategies. But with so many more asset managers than banks, it could take many years for automation to pervade the buy side.

The trading world already highly automated, but applying AI to Investment Management is much more complicated. Markets are always changing, so the strategies that worked yesterday won’t necessarily work tomorrow, and data is much more limited.

Increased adoption of Artificial Intelligence will ultimately rely on individual firms building the necessary knowledge base. And embedding a culture that embraces innovation to progress and competes in modern financial markets. This could well be a gradual, generational shift. Knowledge will be a major barrier because investment firms don’t typically employ large numbers of engineers. And have limited experience in statistics and mathematics, which are key components of AI. Beyond the early adopters, it will be a long time before we see machines replacing humans on a widespread basis.

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