Global Investment Strategy | Global Financial Services

It is fair to say that developments in trading platforms, leading to low latency execution, created the perfect scenario in which artificial intelligence is able to thrive. Trade execution times have dropped dramatically in recent years and while execution only traders have benefited, so have the artificial intelligence programs. What would happen if traders stop using artificial intelligence?

Is trade execution so predictable?

Whether your funds are managed by a third party or you are an execution only short-term/day trader, your activities are being monitored. Maybe not directly, but certainly indirectly,via market movements when particular events occur. The perceived benefit of artificial intelligence is split amongst execution only traders who have, over the years, perfected the art of trade execution. Why would they need the help of artificial intelligence software?

Patterns occur in everyday life

Whether we want to believe it or not, patterns occur in everyday life and actions are repeated time and time again. As humans, many of us prefer routine, structure and the ability to look forward in our lives. In reality, whether you are a fast-moving execution only day trader or your funds are managed by a broker, trading patterns can be traced back decades. So, what would happen in artificial intelligence was removed from the trading environment?

Extended trade execution patterns

In reality, due to the development of low latency execution only trade services, it can be argued that artificial intelligence simply shortens the duration of trading patterns. By effectively second-guessing human nature, artificial intelligence software can jump one step ahead into the future. Then the knock-on effect of artificial intelligence trade execution will bring about another trading pattern and so on and so on. While many people are critical of trade executions carried out by artificial intelligence, these programs are simply mimicking everyday execution only traders.

Would markets be more or less efficient?

When talking about efficiency, we are really looking at share prices and how effectively they reflect public knowledge and non-public knowledge. While artificial intelligence programs can be adapted to scour the Internet for the latest information about a particular share, they tend to relate to trading patterns. As these trading patterns are created by an efficient market, it is difficult to say whether artificial intelligence would make markets more efficient. They may achieve the same end game, in a shorter timeframe, but whether they make the markets more efficient is debatable.

Speed is the key

If we strip everything to one side, when looking at artificial intelligence prompted trade execution, speed is the key. Low latency execution means that software programs can literally carry out multiple deals in a split second. They react to market trends, changing trends, oversold and overbought positions. Let’s not forget, the principle behind artificial intelligence induced trade execution is to mimic human nature not to create new trends.

Surely flash crashes say otherwise?

While many sceptics will point to flash crashes as a demonstration of artificial intelligence and low latency execution only services coming together, to the detriment of investors, is this really the case? Yes, there are scenarios where artificial intelligence trading systems will kick in and perhaps strengthen both downside and upside movements. However, human nature and experienced execution only traders are able to recognise the scenarios. Often taking advantage of what can be relatively quick rebounds and potentially significant profits.

The very fact that artificial intelligence trading systems are reactive rather than proactive suggests that they haven’t quite got the better of humans as yet. If humans could trade at the same speed as artificial intelligence trade execution systems, would they still outperform an experienced trader?