06 September 2023
There is an ongoing debate regarding the use of AI in the financial services industry. While regulators look to introduce protective structures to maintain orderly markets, several potential benefits of AI are emerging. For example, this technology is already used in online trading and for the analyses of colossal data reams.
So-called “algo trading" uses AI-powered algorithms to analyse massive datasets, identify patterns and execute trades quickly. This is not a recent online trading phenomenon; this has been ongoing for some time, although, of late, it has become more refined and more powerful. It is important to note that these algorithms do not set the online trading criteria, as humans define and control this. These criteria could include price movements, news sentiment, and market indicators.
Predictive analytics is an area of online trading based on the fact that history repeats itself repeatedly in the investment market. AI-powered bots can identify trends, correlations and any market anomalies that would take their human counterparts days or weeks to analyse. The information gleaned from historic market patterns can then be used as a basis from which to predict future market movements.
Many people will be surprised to learn that AI technology is used in sentiment analysis, which can then be used as a feeder for online trading. By analysing news articles, social media posts, and other sources of information, these AI bots can gauge market sentiment. Market sentiment plays a huge role in market movements and should be factored into any online trading decisions.
When it comes to online trading, many prefer to give the impression that AI-based technology is controlling and detrimental to the market. AI technology can help traders identify risks and make real-time adjustments to reduce these. In this instance, AI technology-based risk management systems help to retain market integrity and confidence.
The use of AI-powered online trading bots seems to attract the most controversy. Able to operate 24/7 across all markets, this technology can react to changing market conditions and automatically execute trades. While there is no human intervention when it comes to the actual trading, the criteria used are set by humans. A powerful tool in the wrong hands, in reality, AI-powered trading bots are only carrying out the strategies of traders.
Regarding online trading and efficient markets, AI-powered high-frequency trading systems help identify and exploit arbitrage situations. These are scenarios where prices are out of sync, even if they last just a millisecond or microsecond. While there are fewer arbitrage situations today, due to cutting-edge trading technology, they can appear regularly (for a short time) in volatile markets.
Did you know that AI technology systems are available today that can review your historical trades, identify behaviours, preferences and risk tolerances, and create a personalised trading strategy? The strategies are tailored to an individual's goals and risk appetite and can revolutionise their online trading actions.
While many of us hate to admit it, online trading has seen more than its fair share of human errors in the past, which have led to flash crashes and periods of volatility. Human errors can be eradicated by AI technology which is simply carrying out instructions based on detailed criteria. In the long term, this can reduce often costly mistakes in online trading activities.
It is only when you take a close look at the potential uses of AI-based technology in the world of finance that numerous options begin to emerge. Ultimately, the criteria of any AI-powered trading system will be set by humans. They may be able to deal in a split second and analyse reams of information in the blink of an eye, but they don't yet have the capacity to define a starting point. While machine learning does allow AI-based technologies to "think for themselves", these powers are also restricted by base criteria.
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