|The stock market is a trading platform where buyers and sellers come together to exchange securities. / Photo by: Travis Wolfe via Shutterstock|
Many companies across the globe are taking the risk with artificial intelligence (AI) in terms of investments and decision-making process. Aidiya, a Hong Kong-based AI company, has recently taken the decision-making process entirely out of human hands. Last week, it launched a hedge fund or a limited partnership of investors that uses high-risk methods. This means all of their stock trades will use AI–no human intervention at all. “If we all die, it would keep trading,” said Ben Goertzel, the company’s chief scientist.
Metro UK, the UK’s highest-circulation print newspaper, reported that Aidiya is generating 2 percent on an undisclosed amount every day. Although this might seem like a small percentage, this is well above the market average—all thanks to algorithms. This also represents a remarkable shift in the world of finance. In 2017, the algorithmic trading market was valued at $9.3 million. This is projected to increase by over 10 percent every year.
Algorithms have already proved its worth. In 2008, the Dow Jones Industrial Average, a stock market index that measures the stock performance of 30 large companies listed on stock exchanges in the US, lost around 50 percent of its value in 18 months due to a financial meltdown. By using an AI model developed by researchers, they managed a 681 percent return on investment in the same year. “Stock markets have been using automation and machine learning for at least a decade now. Some kind of high skilled human intervention has been and will always be required,” Devina Paul, founding partner of Galvanise Capital, said.
Predicting Stock Market
The stock market is a trading platform where buyers and sellers come together to exchange securities such as shares in companies, commodities, gold, bonds, and the like. Since all of the transactions every day happen online with machines taking over the processes, a lot of measurable data is readily available to work with. A critical mark of success in the stock market is not only measured in finding good stocks to invest but also in determining what price point one can exit or enter a particular stock.
Thus, companies must have a better understanding of trading volumes at play, trend analysis, and optimizing the timing of the trades, which algorithm trading platforms can provide. According to Eudonix, an online site that provides the latest news, updates, tips, and tricks on programming, graphic design, marketing, AI, IoT, and other technology, these trading platforms provide quick analysis, sharpness, and speed. Currently, algorithmic trading is employed by large institutional trading houses, insurance firms, pension funds, hedge funds, mutual funds, and retail investors.
|Algorithmic trading is currently employed by institutional trading houses, insurance firms, pension funds, hedge funds, mutual funds, and retail investors. / Photo by: whiteMocca via Shutterstock|
According to Investor’s Business Daily, an online site that provides exclusive stock lists, investing data, stock market research, education, and the latest financial and business news to help investors make more money in the stock market, algorithmic trading refers to complex math equations used to program computers to make decisions that are used in many industries. For the past years, algorithmic trading has amassed a massive share in the US equity market. Reports showed that over 60 percent of the trades done in the equity market is made possible by algorithms, which are pre-programmed for split-second decision making and sending trade orders to the exchange. The great thing about algorithm trading platforms is that they use minimal decision-making time, which is based on variables such as pricing, market factors, volume, and time, among others.
The evolution of machine learning algorithms and the abundance of stock market data have also become more promising. Thus, it’s projected that machine learning algorithms will be able to learn from past data and forecast stock market movement instead of using pre-programmed algorithms in managing trades. Also, this can make better judgments than humans. Stock market prediction can also cover the prediction of volatility, prices in the market, or the general direction the market will take.
Can Algorithms Predict the Stock Market with 100 Percent Accuracy?
For so long, hedge funds have relied on computers to help make trades. Preqin, a market research firm, reported that about 1,360 hedge funds make a majority of their trades with help from computer models. This accounts for roughly 9 percent of all funds. They also manage $197 billion in total. However, this typical systematic fund has been proven to not always be reliable. It doesn't always perform as well as funds operated by human managers.
Nevertheless, according to Wired, a bimonthly magazine that reports on the effects of science and technology, funds have moved toward true machine learning. This is where AI systems can analyze large amounts of data at speed, and at the same time, improve themselves through such analysis. For instance, Rebellion Research, a New York-based company, has been relying on a handful of machines called Bayesian networks to predict market trends and pinpoint particular trades.
However, even after all the progress, AI will still be left with the human condition of imperfection. As Swiss entrepreneur and investor Alessandra Sollberger said, “In 10 years’ time, machines will be able to predict the stock market over a longer timeframe but never at 100% accuracy. There will always be some data which isn’t captured; you’re assuming full accuracy in your data-capturing process, and that kind of state is impossible to achieve, even for machines.”