AI in the financial markets – Revolution or Evolution?

Artificial intelligence (AI) is becoming more commonplace in news headlines and global tech companies like Apple, Google, and Domo. In “Why it’s time to rethink AI” by Julian Togelius the case for AI’s growing use across a diverse range of industries is made. Along with this discussion is the discussion of how revolutionary the use of AI can be.  Julian makes the sound observation that in long standing markets  it “can be easy to overlook the opportunities afforded by some of the most revolutionary technologies of our age“. Business with longevity in their prospective markets quite often built their products, business model, KPMs and technology stack around pre-AI concepts. Given that many approaches to AI or machine-learning used to require super computing power it is understandable that many businesses were built without incorporating approaches that provide powerful insight without increases in staffing. However with the great commoditization of computing power and growth in usable AI models that have occurred in the last decade now is the time to invest in reassessing these legacy business models, legacy technology systems. Now is the time to transform how a business gains insight not only internally but also in the products and services they offer their clients.


“A revolutionary technology is just that: revolutionary. To appreciate its potential, we need to break out of thought patterns that were formed when the technology did not exist. We need to rethink designs that are built on its absence.” – Julian Togelius


This AI, machine learning, technology transformation while new for many markets is not new for the financial markets. The ongoing and rapid pace of change in the machine learning realm powers some of the greatest growth on Wall Street throughout global markets. One of the fastest growing hedge funds on Wall Street is Two Sigma; a firm that has staked their success and growth on quantitative approaches to investments. The leaders in the financial industry are exploring hundreds of alternative data sources, many created by AI or machine learning techniques, a month – all in the pursuit of growing their business by delivering significant alpha. Many firms are acknowledging this shift in availability and capability of technology to identify new trading models. As this broader embrace of new technology grows within the financial markets we are seeing former tech giant executives become part of hedge funds. According to Nathan Vardi at Forbes “Bridgewater Associates, the world’s biggest hedge fund, has added former Apple and Microsoft veterans to the top of its executive team. Former Google executives have landed at Two Sigma and BlackRock, the world’s biggest asset manager.” With this ongoing adoption of insight gaining, repeatable, and actionable AI algorithms being applied in the markets we will continue to see a transformation of not only how alpha is generated but also who incorporates these evolutionary technologies to grow their trading and risk management capabilities.

Which leaves us with – Evolution or Revolution? Some industries will need to apply ai, machine learning, NLP and other technology capabilities in a revolutionary fashion. They will need to abandon their old methods and approaches. For others evolution, the steady and practiced application of new technology, computing insights and capability will continue to be the engine of continuous transformation in their businesses.  Quantitative hedge funds are fully committed to the evolutionary approach – acknowledging and adapting to the core concept that whether its AI or the next new technology; their greatest success will be in adapting, integrating and delivering results.