Introduction
The future of artificial intelligence is shrouded in potential but fraught with uncertainty.
We’ve all been amazed in the last few weeks with the developments in ChatGPT, allowing users with no experience to write extensive coding, create works of art, and draft compelling articles in seconds.
But even before this, there are a number of factors that suggest that artificial intelligence will play an increasingly important role in stock market trading in the years to come.
Already, so much of the volume we see in markets is being carried out by institutions with almost no human involvement, buying and selling through algorithms written to recognise chart patterns, and make the perfect trade at the perfect time.
So is it the future, and do we stand a chance as humans in the market?
Data, Data, Data
The first factor is the increasing availability of data. With the advent of the internet and the proliferation of digital devices, we are generating more data than ever before.
Even since the financial crisis a decade ago, the level of exposure the day to day investor has to an extensive array of analysis has grown exponentially.
Rather than phoning your broker to invest in a company you read about, you can make trades in seconds at the touch of a button, on compelling and gamified apps.
As a result, a huge amount of user data is being created, both for brokerages, and in the volume of trades being made every day.
As retail investors, we don’t necessarily get to see all of the data of who is buying what, and at what price, but with the use of technology such as Bloomberg Terminals, institutional investors have tremendously powerful resources to make better decisions.
This data is regularly being collected and analysed by artificial intelligence algorithms, which are able to learn and evolve over time.
If you’ve ever been investing in the market, and all of a sudden the trend reverses without any clear reason, it’s very likely one of these trading algorithms has hit their requirements, sending a huge buy or sell order into the market, which can be more than enough to move a stock.
As a result, they are becoming increasingly better at predicting stock market trends.
To keep up, retail investors need to utilise tools which can analyse data in the same way, such as TortoAI, which investigates trends in your portfolio.
Processing Power
The second factor is the increasing computational power of artificial intelligence algorithms. Thanks to Moore’s law, the number of transistors that can be placed on a chip is doubling every two years. This means that the processing power of artificial intelligence algorithms is also increasing at a rapid pace. This is enabling them to analyse more data more quickly, and to make better predictions about the stock market.
Clearly, there is some level of intuition from a human perspective which cannot yet be generated by AI, but with advances in machine learning, it won’t be long before these programmes can consider the future in a very similar way to humans.
Algorithms
The third factor is the increasing sophistication of artificial intelligence algorithms. As they learn and evolve, they are becoming better at mimicking the thought processes of human traders. This is enabling them to make more accurate predictions about the stock market.
Taking the emotional side out of investing, and focussing purely on the trends and variables that matter mean that algorithms can trade on the facts, usually leading to ruthless efficiency and success.
Emerging Technology
The fourth factor is the increasing use of artificial intelligence in stock market trading.
Many of the world’s largest financial institutions are already using artificial intelligence algorithms to trade stocks. As these algorithms become more sophisticated and more successful, their use will likely become more widespread.
If retail investors are not able to utilise these models, then there is a very high likelihood of a gap growing between the returns of AI driven institutions, and the regular investor trying to make decisions with limited data.
Speed of Response
The final factor is the increasing volatility of the stock market. The stock market is becoming increasingly volatile, and this is providing opportunities for artificial intelligence algorithms to make profitable trades.
In years gone by, we might see minor volatility in most trading windows, with earnings reports and black swan events causing larger moves, but with a constantly moving environment, we regularly see 5% swings in the market.
Algorithms love this volatility, since they can ride the price up and down through options contracts and leveraged asset purchases. By timing their buying and selling just as the market is on a knife edge, they can tip the scales in their favour, making a good trade even better.
Is it the Future?
All of these factors suggest that artificial intelligence will play an increasingly important role in stock market trading in the years to come. As artificial intelligence algorithms become more sophisticated and more successful, their use will likely become more widespread, and they will come to play a dominant role in the stock market.
If us retail investors want to keep up, we need to ensure we continue to innovate, and make the best decisions we can.