Investing in Artificial Intelligence

Samantha Fischler is a Junior Financial Analyst at I Know First.

Investing in Artificial Intelligence

Summary

  • I Know First’s algorithm is largely based off of artificial intelligence
  • Many mid and long term investors and buy-side firms engaging in high-frequency trading
  • What Robo-advisors do for us
  • Artificial Intelligence’s place in the world of banking
  • Companies are engaging in mergers and acquisitions to make themselves more tech savvy

Artificial Intelligence

Some Background

To sum up “I Know First about the Latest in Artificial Intelligence Trading,” algotrading is using a computer that follows a specific set of rules to automatically execute trades. I Know First’s algorithm is largely based off of artificial intelligence (AI), a branch of computer science that deals with programming machines to make decisions with intelligence as a human being would. Artificial intelligence plays a role in many industries and businesses and is very much prevalent in the world of finance. The following article will explore the role that AI is increasingly playing in the world of finance. As of 2014, the artificial intelligence and robotics industry was valued at $10.5 billion and is expected to be worth as much $153 billion by 2020.

Artificial Intelligence

High Frequency Trades

Artificial Intelligence based algorithms are all the rage nowadays with many mid and long term investors and buy-side firms engaging in high-frequency trading (HFT). These traders prefer to set a specific set of instructions and let their supercomputers perform the trades with speed and immediacy once the trade criteria are met. The benefit to this is that computers work much more quickly than humans and can get better prices per share than humans due to the speed at which computers can operate. The problem with this is that in times of volatility, the automated HFT systems can lose millions of dollars in a matter of seconds, whereas humans are able to reason the best solution to the volatility or fluctuations because they are not hardwired to do so under specific conditions.

Robo-Advisors

Robo-advisorsArtificial Intelligence are similar to normal human advisors in terms of their thought process and researching techniques, but are accessible 24 hours a day by any device with internet capabilities. Robo-advisors are also significantly less costly than the salary and commission that a human advisor receives. Robo-advisors use artificial intelligence to give financial advice and suggest a strong individualized portfolio based on a dialogue with the customer and taking the customer’s very specific situation and preferences into account.

Artificial IntelligenceAn example of a company that is utilizing technology to create Robo-advisors is Charles Schwab & Co. Inc. They recently launched Schwab Intelligent Portfolios, a Robo-advisor that helps customers build and manage their portfolio so the customer doesn’t have to worry about it and can reach their financial goals. Customers don’t have any expenses in using this service except for the money that they decide to invest. Schwab makes its money from the management of Schwab ETFs, working with different ETFs who Schwab then recommends, and the cash feature on accounts.

Banking Bots

Companies like Kasisto have been implementing AI into banking services by creating banking bots. Kasisto uses a conversational AI platform to work with customers. Kasisto’s MyKAI is a banking robot that keeps track of all aspects of the user’s expenses from where they spent their money to what it was on and a detailed breakdown of dates and other relevant information. In addition to recording expenses, MyKAI users are able to make payments to friends by sending a quick message to MyKAI. MyKAI will then use apps like Venmo or the customer’s bank to complete the money transfer at the customer’s discretion.

Leading members of Deloitte’s “Technology & Enterprise Application” department surmised that banks and insurance companies are always trying to improve the customer experience so they will continue to use humans for customer interactions and service purposes. However, back-office jobs use artificial intelligence because there is no customer interaction and using robots is faster, more cost-effective, and efficient than using humans. 

Combining Efforts

Artificial IntelligenceSome companies are engaging in mergers and acquisitions as a solution to the rise of algotrading and artificial intelligence based business practices. For example, Goldman Sachs acquired Honest Dollar to provide itself with a greater, more diverse, and accessible online presence. Similarly, BlackRock acquired FutureAdvisor in April 2015, bringing new technologies into the company and staying ahead in the technologically savvy finance world. Additionally, Vanguard created a hybrid wealth management system in which a computer does asset allocation and rebalancing. The system also connects you to human advisors over the phone and video chat to answer all questions and discuss new financial situations and life events. CEO of JPMorgan Chase Jamie Dimon recently said that his company could build a competing service against online portfolio management services.

Prospects

Artificial IntelligenceI Know First uses their algorithm to predict and analyze the stock market. The algorithm incorporates artificial intelligence and machine learning capabilities to ensure efficiency and that the algorithm is constantly improving upon itself. Going forward, IKF’s algorithm will continue to expand its vast (15 years of information) database due to its machine learning capabilities and continue to contribute to financial services and private investors. I Know First, however, brings in the unique intelligence of humans and combines it with the incomprehensible capabilities of machines. Two is definitely better than one in this case of trading as the computer and AI aspects allow for more data to be incorporated into research, while humans have ultimate trading power leaving less room for error and extreme losses.

CB Insights CEO Anand Sanwal notes about algotrading and artificial intelligence “It’s not all roses…There are headwinds…When market volatility picks up, people want to talk to an advisor.” This is why I Know First’s methodology works. It reduces the risk of rushed trades during volatile times and during those times, allows for human interaction for reassurance of smart trading because we are not programmed machines incapable of adjusting to situations that we have never experienced before.

Conclusion

To quote Mark Zuckerburg “The biggest risk is not taking any risk. In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks.” Financial companies that are incorporating artificial intelligence into their practices certainly embody the founder and CEO of Facebook’s message. Developing the algorithms and investing platforms that depend on artificial intelligence is both capital and labor intensive. In the long run, it will completely alter the way that the world of finance works and will have a great return on investment.


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