Automation and artificial intelligence are profoundly transforming trading and markets. But proceed with caution.
Many scientists and futurists agree that the effects of artificial intelligence and automation on society are difficult to predict. Theories range from a complete and spontaneous change in society (the so-called Singularity) to more utopian outcomes.
While many predicted that the tip of the spear for such technology would play out in areas such as medicine or general computer system markets, the AI revolution is already underway in the financial markets. Many of the predicted challenges and solutions are occurring now -- in real time.
Financial technology becoming possibly the first major component of society to be completely AI enabled is not surprising if you consider that financial markets are inherently big-data intensive, attract bright minds and high-quality capital, and often have a short investment-to-profit time horizon.
Market-making firms facilitate market liquidity for buyers and sellers and provide a strong example of the automation effect. Nearly all market-making is presently dominated by machines that employ AI techniques, including advanced pattern recognition. Every trading day, numerous trading teams compete to provide the most efficient results using AI-centric techniques.
If you take a moment to process this, you realize that the prospect of AI driving critical aspects of society is not science fiction; it is here now as we have already essentially handed the "keys" to a critical component of our markets to machines.
This change did not happen overnight. It has been underway since the beginning of the new millennium. And it is not the result of a single "big-bang" design built by a single elite team. It is a system created through evolutionary steps -- a collection of many teams building various pieces of this new ecosystem where viable technologies survive and weak ones perish.
The final manifestation of this new market ecosystem will yield a number of direct and indirect opportunities. For example, we build a product called "Riskbot" that we describe as a supercomputer designed to watch supercomputers. Riskbot polices trading traffic between trading systems and exchanges -- a sort of immune system for the new market ecosystem. The rise of multi-gigabit networks and super-charged data-delivery products provide the circularity system and new mass storage, and distributed databases provide the analytical capability of the new intelligent market.
Challenges and Benefits
Like all new inventions, the new markets will likely have unintentional mishaps such as the Flash Crash of 2010. Moreover, as markets are inherently of money and about money, attempts to exploit and misuse such power are inevitable, and the need to counter such risks is well underway and will continue to evolve with the rest of the system.
The potential destruction of employment and the question of whether such job displacement will resolve itself remain substantial concerns.
However, the application of the discoveries made in finance being applied to other fields is also inevitable. For example, one group of successful traders left finance and are applying their technology to medical diagnostics product.
We Must Take Great Care.
The markets evolution from the primordial ooze of computers, networks and massive storage systems to a complex, intelligent and somewhat singular market entity will impact society well beyond finance. It will ripple to and through every aspect of our existence. That's because the health of our society and the markets are inextricably linked.
While it is easy to postulate that the hazards of intelligent markets can be dismissed because we have always solved the problems that progress poses in the past, we must remember that such a premise relies on the idea that the future will be similar to the past. If there is one thing for certain, it is that the past and the future of technology will differ.
Hence as we unleash this awesome power we must do so with continuous review and self assessment avoiding any emotionally biased or dogmatic views that are ironically non-existent in the machines we are creating.