Artificial intelligence (AI) has played a growing role in capital markets over the past fifteen years. The concept most commonly refers to the development of computer systems that are capable of undertaking decision-making tasks that normally require human intelligence.
However, computers are able to perform such tasks at exponentially higher speed and frequency, one that is impossible for humans. And at lower costs. Algorithmic trading, an AI application, grew six-fold from 2003 to 2012, reaching 85% of market volume.1
According to Deutsche Börse Group, ‘big data’ is currently fueling the evolution of AI-driven investment analytics.2 The term alludes to the role that AI has played in enhancing the reach of data. This has been done through the development of tools that enable more efficient ways to mine, analyze, curate and utilize data, essentially powering the conversion of that information into better investment decisions and new investable products.
New world technology
Big data is considered AI’s life-blood and has incited a record level of interest in these technologies. Investment in AI startups has grown to nearly 2.4 billion dollars in 2015 from 282 million in 2011, according to one study.3
The barrage of data coming from an increasing number of sources, and ever more efficient analytical methods and architectures are showing the potential to transform the entire asset-management industry through vast competitive advantages. This disruption can already been seen in the success that interactive investment technologies such as robo-advisors have experienced. A recent PULSE ONLINE article reviewed the growth of this sector.
Transforming passive investments
Smart beta and factor investing strategies are another example of how big data is transforming the investment landscape, in this case in passive investing. Smart beta is the name given to benchmarks whose membership is constructed on criteria other than market capitalization. They rely instead on metrics such as dividend or value to construct an investment strategy.
Factor investing is a strategy where securities are chosen based on attributes associated with higher returns. While methodologies can differ, such strategies utilize an increased level of granularity when choosing securities.
Data and technology will continue to gain a bigger role in how money is managed. Just like the invention of the Internet browser transformed the retail industry, the disruptive power of new technologies cannot be overstated. The asset-management industry may be at the early stages of having a similar experience. Only this time around, with more advanced technology, higher penetration ratios and two decades of experience in how innovation can truly transform the way we live.
1 Morton Glantz and Robert Kissells, Multi-Asset Risk Modeling: Techniques for a Global Economy in an Electronic and Algorithmic Trading Era (Academic Press, 2013).
2 Future of Fintech in Capital Markets, Deutsche Börse Group & Celent, June 20, 2016
3 CBS Insights, June 2016.