Firms Likely to Dominate Markets Using AI

The increasing use of AI technology is likely to create incumbent firms that dominate markets, said panellists at the Profit & Loss Forex Network New York conference. However, they also said it might not be the biggest firms in the markets today that become these incumbents.

“I think [AI] is changing the landscape quite a bit,” said Andrej Rusakov, a partner at Data Capital Management, a hedge fund that uses AI tools to develop trading strategies. “People who are missing the wave are going to be left behind, I don’t think there’s any question about it. I think that human day traders will be wiped out, if they’re not already.”

He added: “What’s happening is disruption from the lower ends. You start with short-term forecasting and then you move up the value chain to making longer-term bets and longer-term predictions. So it is redistributing the way that money is being managed and more of it is going into quantitative firms with novel approaches.”

Rusakov also pointed out that the barriers to entry are falling for firms wanting to make use of AI technology within financial services. This is because the cost of computing power and data storage is cheaper than it has ever been, and firms no longer need to make massive investments in hardware to scale up their businesses.

However, Richard Rothenberg, executive director at Global AI Corp, countered this last point by claiming that the cost of data and the complexity of the data needing to be sifted through to provide value to financial services firms, has increased.

“This may actually lead to a concentration of not only resources, but capabilities and a reduced number of participants, in a very similar way that happened in the HFT growth days where you went from hundreds of participants – many of them going broke like Knight Capital – to suddenly where we have less than 10 who control 90% of market liquidity,” he said.

Indeed, Michael Recce, the chief data scientist at Neuberger Berman, predicted that firms using the right technology will come to dominate and have 80% of the markets that they trade, but also said that the “winners” in these markets are not necessarily the largest firms in the market today.

“The point is, there’s going to be a complete turnover, because lots of the firms that aren’t using this [technology], no matter how much they spend they’re going to end up with the wrong people, the wrong data and the wrong process, because they’re too top down in their decision process. There will be winners but it’s not necessarily the people who are winners currently, it’s going to be a new set of winners,” he said.

Gaurav Chakravorty, co-founder of qplum and a former partner at Tower Research Capital, agreed with these comments and added that the use of AI tools will mean that the eventual incumbents will continue growing in size: “In financial services, if you have a firm that is bigger, cheaper and makes money most of the time, everyone will migrate to using them.”

However, he did point out that there is a lot of hype around AI in financial services right now, and that this is disproportionate to the actual use cases for this technology currently being implemented. As an example of this, he recounted a story about an allocater who recently asked a hedge fund manager if they use AI, only for the manager to reply that they do and then push a 25-year-old analyst in front of the allocater as proof of this.

“Currently in financial services, we are talking a lot about AI, but practically no one is using it,” he concluded.

The increasing use of AI technology is likely to create incumbent firms that dominate markets, said panellists at the Profit & Loss Forex Network New York conference. However, they also said it might not be the biggest firms in the markets today that become these incumbents. “I think [AI] is changing the landscape quite a bit,” said Andrej Rusakov, a partner at Data Capital Management, a hedge fund that uses AI tools to develop trading strategies. “People who are missing the wave are going to be left behind, I don’t think there’s any question about it. I think that human day traders will be wiped out, if they’re not already.”

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Galen Stops

Galen Stops