Artificial Intelligence in Banking: AI Makes its Way to Investment Banking’s Trading Floors

  The article was written by Moises Meir, a Financial Analyst at I Know First

Artificial Intelligence in Banking

Summary:

  • Extent of artificial intelligence’s potential.
  • UBS showcases new applications of AI in trading floors.
  • How Artificial Intelligence is used at I Know First
  • Artificial Intelligence in Finance

Artificial Intelligence in Banking

It has been a few years now since artificial intelligence became a popular topic of conversation. Several AI related movies, TV shows, books and documentaries have been released for the general public to enjoy. Everyone got interested, but mostly everyone grew confused. Everybody knows that for entertainment purposes, TV shows and documentaries are often exaggerated. The public is eager to know what AI is doing in the present day.

There are thousands of answers for that question. Amazon has developed its own AI-based voice-recognition product Echo. Intelligent agents are being used by the cyber security company Deep Instinct to detect malware, and by PayPal to prevent money laundering. Most companies would have applications for AI, but its actual use is up to the manager’s creativity, business thinking and budget.

One of the latest applications for artificial intelligence is in the banking sector. UBS this week showcased how two artificial intelligence systems can help traders perform better at the Swiss bank’s futuristic new City of London office.

Artificial Intelligence in Banking

Many of the world’s biggest banks have for years been automating manual, repetitive tasks done by support staff to save money. But now they are putting the latest forms of artificial intelligence to work at the heart of operations among their star traders, allocating funds and analyzing data to develop strategies.

The first system that was showcased is a relatively simple, automated program for dealing with clients’ post-trade allocation requests. The system scans for emails sent by clients detailing how they want to divide large block trades up between funds. It then processes these and executes the transfers. It saves time by doing a task that would normally take a person about 45 minutes in only about two minutes, while freeing investment bankers up for other tasks, such as calling clients.

The second of its new systems uses machine learning to develop new strategies for trading volatility on behalf of clients. It examines vast amounts of trading data and builds a strategy based on learning from market patterns. UBS claims it is the first “adaptive strategy” product offered by an investment bank.

When the strategies were back-tested by looking at how they would have performed, they achieved annualized returns of 10.3 per cent, outperforming the 6.9 per cent returns of the benchmark S&P Put-Write index.

Artificial Intelligence for Algorithm Trading

I Know First’s co-founders Yaron Golgher and Dr. Lipa Roitman came up with the idea to apply Artificial Intelligence and Machine Learning in the algo-trading world. Their company uses predictive algorithms based on artificial intelligence to process years of historical stock market data and develop different investment vehicles. There are two tiers to I Know First’s service. Tier I is a client-based daily support forecast. It provides clients with a heatmap of the top picks for bullish and bearish stocks over various time horizons. Tier II is institution-based. For Tier II, I Know First uses its AI algorithm to structure an investment portfolio.

I Know First uses a state of the art, self-learning AI-based algorithm to forecast and uncover the best investment opportunities. Every day, the algorithm inputs data from 7,000 different financial assets, then the data is analyzed by comparing it to stored data and trends from the last fifteen years. After thousands of relationships and data points are analyzed, the algorithm outputs a prediction for each asset in six timeframes. The form of the prediction is of two numbers that indicate which asset to buy, hold and sell. Then an email with the prediction is sent to all subscribers.

Artificial Intelligence in Banking

The I Know First Market Prediction System models and predicts the flow of money between the markets. It separates the predictable information from any “random noise”. It then creates a model that projects the future trajectory of the given market in the multidimensional space of other markets.

The system outputs the predicted trend as a number, positive or negative, along with the wave chart that predicts how the waves will overlap the trend. This helps the trader decide which direction to trade, at what point to enter the trade, and when to exit.

The model is 100% empirical, meaning it is based on historical data and not on any human derived assumptions. The human factor is only involved in building the mathematical framework and initially presenting to the system the “starting set” of inputs and outputs.

For experienced investors, it has the potential to save substantial amounts of time, which could be used for other important issues. For novice investors it is an easy way to enter the trading world, as it can serve as a lead and as a guideline on how to analyze stocks. In addition, all subscribers would enjoy the advantage of leaving emotions out of the mix. It is known that sometimes emotions like greed and overconfidence influence investors to make poorly timed decisions. With I Know First, emotions are off the grid as the model is 100% empirical.