The impact of artificial intelligence on investment strategies

While financial markets are always at the forefront of new technology, artificial intelligence (AI) is having an impact like nothing before it. One of the frightening things is that many people believe we are only just scratching the surface and there's a lot more to come. Whether looking at investment decisions, risk assessment or simply the analysis of big data, the potential going forward is huge.

 

An overview of AI technology in finance

 

There are many different aspects of AI technology which are shaping the way we think about investments and transact. There are several significant issues to consider, such as:-

 

Machine learning

 

This is an element of AI technology that allows machines to learn using data and algorithms, effectively copying the way that humans learn. The idea is simple: not only will these machines learn to do different tasks, but they will also learn how to improve themselves. They are effectively learning on the job.

 

Neural networks

 

Recent technology has gone one step further to replicate the human brain by adding various interconnected nodes or neurons in a layered structure. So we now have AI that can learn like the human brain and new computers that are structured in the same manner. If they are truly able to think like humans, surely the sky is the limit?

 

It’s not difficult to see the many ways in which AI technology can/could be used in the financial services industry, but there is one downside, it is proving challenging for financial regulators.

 

AI investment decision-making

 

So, we have new technology on the verge of thinking and effectively acting like a human brain, although empathy is proving challenging to mimic. While there are many areas to consider, some of the more influential include:-

 

Data analysis

 

Affectionately called "big data", this allows AI systems to use existing data, creating a foundation for future development. For example, ChatGPT uses 1.2 trillion parameters to create the answers to your questions.

 

Algorithmic trading

 

So, we have data and systems that effectively teach themselves, and we also have algorithms that can execute trades at the optimum moment. The obvious danger here is that many different AI systems might trade at the same time, significantly impacting the market. Can you imagine a raft of stop-loss limits being hit at the same time?

 

Sentiment analysis

 

When discussing AI in financial services and its impact on financial markets, it's essential to recognise that this stretches beyond just the markets themselves. AI systems available today can constantly monitor investor sentiment, whether through market trades, price trend lines, official news, rumours, or even social media comments. Can you imagine using a system that will scour the World Wide Web to monitor investor sentiment and react accordingly?

 

AI in risk assessment

 

There has always been an element of risk analysis when considering any investment. Thankfully, while on the one hand, we have high-tech systems that will find the optimum share and deal at the optimum time, it's also important to consider all of the potential risks. Ai is already helping in a number of ways such as:-

 

Predictive analytics

 

Just as modern-day sales systems - the ones that display the adverts you were thinking about in your head - will present you with products and services of interest, AI has the ability to forecast market trends and potential risks. Does it really know what investors will do before they do it?

 

Fraud detection

 

This is an area that is very important for regulators: detecting fraud and ensuring the integrity of financial markets. Even though there has always been an emphasis on financial services companies monitoring their own advice and dealings, fraudsters are now using more complex systems. However, the regulators are fighting back, combating fraudulent activity using like-for-like AI technology. Genius!

 

Summary

 

The introduction of AI has taken the speed and accuracy of modern technology to a different level. When it comes to investment trading and the ability to learn (effectively on the job), this is a game changer for investors. Unfortunately, we have seen instances where this type of technology has been used to manipulate markets and carryout fraudulent activity. Even though the regulators are using like-for-like technology to combat these issues, it's an ongoing battle!

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