Are AI the future of Wall Street?

As a finance major, whenever news comes out that artificial intelligences are set to become the future of financial trading I get a little nervous.  Many people think that sure, we could eventually create a program that is able to make real time decisions based around the market. But a lot of other people say that while they would be able to analyze concrete data, there is still too much left to interpretation for that to truly happen.  So which side is right, and should I switch my major at this point?

In the world of trading, some tech startups have already begun to experiment with using AI’s as their only way of trading.  Back in January tech startup Aidyia turned on their full tie automated hedge fund program.  On it’s first day of operation they saw a 2% return on their investment.  ( source )  While this isn’t a significant return considering they could make more just investing into a safe S&P index, it does prove that we have the capabilities to make a positive return without human intervention.  According to Preqin nearly 10% of all operating hedge funds in the world make a majority of their trades using computer generated models.  By continuing to allow the computers to create more and more models, firms are hoping that the programs will begin to recognize patterns in the way that humans do and trade on what might happen in the future.

As AI continue to get smarter, their return on the investments will potentially be able to outgrow that of a conventional trader.  This article from August outlines the newest player in the AI trading game, a program called “Emma”.  What they say is different about this program is that it’s programmed to not only look at the securities market, but also what is happening on a global economic scale.  In the six months before they had unveiled the project they had it trading a set of stocks that it determined would be smart investments.  Since then, their portfolio size has grown by 30% and they are donating the extra proceeds that it makes to charity because for now they are just interested in seeing how far they can push this AI growth.

Traders work on the floor of the New York Stock Exchange on Monday, Sept. 15, 2008 in New York. A stunning reshaping of the Wall Street landscape sent stocks down sharply Monday, but the pullback appeared relatively orderly _ perhaps because investors were unsurprised by the demise of Lehman Brothers Holdings Inc. and relieved by a takeover of Merrill Lynch & Co. (AP Photo/Jin Lee)

Trading floor at the NYSE ( source )

This isn’t just something that is happening in the U.S. market either.  Later this year in Japan a new AI developed by Mizuho will work along side human traders in an effort to help them make more informed decisions.  Their goal with this system is to use the computer to show historical trends and interpret that into the future, and then use the actual trader as more of an evaluation of whether it’s actually worth their investment.

For now I don’t believe that traders and finance students should be worried about AI’s completely replacing them, as they are probably more useful for simply aiding in the job.  But it is an interesting future change in the way the industry operates and will become an important thing for anyone interested in the markets to know how to work with.


3 thoughts on “Are AI the future of Wall Street?

  1. Brendan Mironov


    I just got out of my Finance 410 exam that deals with derivative and options trading and oddly enough there was a question about index arbitrage and program trading. Index arbitrage is when traders try to capture a mismatch in pricing between the index and the stocks that underline the index. Smart people have built software and algorithms that can take advantage of this miss pricing and execute trades in a matter of milliseconds generating a risk-less profit. In this particular case, humans have no chance in identifying index arbitrage faster than these algorithms. However, there is much more to finance than index arbitrage. There are various different kinds of complex trading that can not be done by AI, at least not yet. In addition, there is value that certain money managers bring to the table that AI’s do not. Because of these reasons, I would not worry too much about AI just yet. Take a look at this article by Cornell University that discusses the value that human money managers bring to a portfolio.

  2. dff5115

    I am also a finance major so this article caught my eye. I believe that like most professions the use of technology makes it easier and more efficient. I don’t believe that AIs could completely take over investment banking i still believe that some human aspect is needed. As you said in the article the AIs preformed a lot better when assisted by humans. I think the future is AIs being used by traders in order to increase performance

  3. Gulianna E Garry

    Hi Daniel, I am also planning to start a track in Finance in Smeal. After reading your article, I disagree with the use of Al and how it can effect Wall Street. My father has been working on Wall Street since the early 90s and I have first hand seen the craziness of the New York Stock Exchange. Nothing beats the intelligence that some of these people have when they are trading and dealing with stocks and options. I do not believe that Al could completely replace the men and women who work on Wall Street. Seeing my father work, now at an older age, it is amazing how he and is co-workers can read the stocks and know exactly when to trade and buy. I do not think that this system could beat the intelligence of these people who know the market so well. I found this article talking about artificial intelligence and I believe you will enjoy! Here it is.

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