How AI Is Transforming the Future of Financial Markets

This article was contributed by Frank Kern who works as a freelance writer for Coinzilla.

New insights, faster trade execution, better information, traders take every advantage they can get. Unfortunately, we often run into the problem that we are humans and cannot do all of these things in parallel. Sometimes you spend your whole day on research, missing valuable trading signals, sometimes you trade all day, but miss out on informing yourself on news or new strategies. This is where automation comes into play, specifically AI.

In the 2010s multiple famous essays on the topic of “Software eating the world” were published. In 2023, Balaji Srinivasan tweeted, that “software was eating the world, and now AI has eaten software”. AI helps us to leverage software in ways not possible before. ChatGPT can write you 20 essays for you in seconds, Midjourney gives you the superpowers of a digital artist, Github Codepilot creates thousands of lines of code for you. AI increases productivity 100x, small teams are now able to compete with huge companies with the assistance of AI. But what about financial markets, how is AI transforming the future there? 

Firstly, automation in the financial markets sector has already been ongoing for a longer time with something called algorithmic trading. Algorithmic trading is all about using computer programs to automate trade execution. As The Economist eloquently puts it, the impact of this shift is such that people almost do not trade stocks anymore. The utilization of massive datasets, coupled with advanced processing capabilities and artificial intelligence has transformed the landscape of trading, rendering traditional methods obsolete. For example, due to computerization and algorithmic trading, Goldman Sachs decreased the number of people trading stocks from 600 to 2, from 2000 to 2016. 

With AI it is not only about automated trading anymore, but the whole process of financial analysis will be turned upside down. In the past, teams of analysts would spend countless hours poring over hefty company reports, tediously extracting vital data and trends. These analysts would sift through pages of financial statements, market research, and operational statistics to provide valuable insights for investors and businesses. Fast forward to today, and Artificial Intelligence (AI) is revolutionizing this labor-intensive process. Instead of human eyes combing through each page, AI can instantly process thousands of reports simultaneously. Not only can it swiftly identify the most crucial numbers and data, but it can also generate concise summaries for quick reviews. The breadth and depth of AI’s capabilities are staggering: from detecting subtle patterns across multiple reports to making predictions based on historical data. 

Not only does AI change how investment companies approach financial markets, but also for retail traders there are many AI tools that enhance the experience. It offers real-time updates on stocks and cryptocurrencies, acting like a 24/7 personal investment guide. Instead of digging through heaps of information, AI quickly points out major market shifts and helps traders understand why these changes occur. For example, if a stock is surging, AI might highlight recent news or company announcements that influenced that surge. This is particularly helpful for beginners, breaking down the often complicated world of trading into bite-sized, understandable insights. Plus, there’s no need to be tied to the news cycle constantly. When traders want a deep dive, AI can guide them to the latest, relevant news articles, ensuring they always have the best information at hand. In essence, AI is making trading more accessible, informed, and efficient for all.

AI Predictions for stocks

Another intriguing example of this shift is the “ChatGPT Portfolio” experiment. It boldly posits that ChatGPT can select stocks with more finesse and insight than even some seasoned hedge funds. This isn’t mere speculation; a whopping $33 million has been deposited by investors eager to have their portfolios curated by ChatGPT’s algorithms. Also, other platforms like Composer allow for completely personalizing the strategies even more. By posing questions like, “What stocks should I buy if I believe AI will dominate the future?”, users can get tailored stock recommendations, effectively mimicking the insights that might be offered by “superinvestors”or market experts.

So even if you are not super technical, but rather a visionary, as an investor you can simply articulate your goals, desired strategies, and risk concerns in everyday language. The AI, in turn, assists in crafting a robust, tailored strategy, bridging the gap between complex market analysis and the aspirations of everyday investors. 

So, as you can see from the text above, AI has already made many interesting changes in the industry. What we believe is that the transformation of financial markets has just begun and AI will entirely reimagine segments of the trading process and broader financial markets. Much like DeepMind’s AlphaGo did for the game of Go, where traditional strategies were overhauled by AI-generated tactics previously inconceivable to human players. Move 37 in AlphaGo’s match against the Go champion Lee Sedol was an unexpected and innovative play, showcasing AI’s potential to think outside human conventions and redefine strategy. 

Similarly, to move 37 traditional indicators and strategies, honed over decades, could be significantly enhanced or supplanted by AI-driven methodologies. Take, for instance, candlestick pattern recognition within financial charts. Humans have historically relied on established candlestick patterns to anticipate market movements. However, by feeding AI vast arrays of historical financial charts, we could usher in the birth of novel patterns—patterns far more nuanced and potentially profitable than anything previously identified.

But the transformation doesn’t stop at chart patterns. The depth and breadth of financial markets present myriad opportunities for AI-driven innovation. For instance, AI could overhaul risk assessment by synthesizing vast amounts of data points—ranging from geopolitical events to minute shifts in consumer behavior—providing traders with profoundly holistic risk profiles. Or, in the realm of derivatives, AI might conceive entirely new financial instruments tailored to the unique needs and risk appetites of investors, much like how personalized medicine is revolutionizing healthcare.

The horizon is expansive. Just as we now look back at AlphaGo’s gameplay with wonder, we might soon regard our current trading strategies as rudimentary sketches of a grand tapestry that AI is only beginning to weave in the financial markets.

About the author

Frank Kern is a freelance writer for Coinzilla, specializing in artificial intelligence, data science and cryptocurrencies. Frank’s work reflects his passion for exploring the impact of AI and data science on various industries, as well as breaking down the intricate world of cryptocurrencies for everyday readers.