For the past year, we as a society have been worried sick about Artificial Intelligence eating the jobs of 3 million truck drivers. Turns out that a more imminently endangered species are the Wall Street traders and hedge fund managers who can afford to buy Lamborghinis and hire Elton John to play their Hamptons house parties.
So maybe “hooray for AI” on this one?
Financial giants such as Goldman Sachs and many of the biggest hedge funds are all switching on AI-driven systems that can foresee market trends and make trades better than humans. It’s been happening, drip by drip, for years, but a torrent of AI is about to wash through the industry, says Mark Minevich, a New York-based investor in AI and senior adviser to the U.S. Council on Competitiveness. High-earning traders are going to get unceremoniously dumped like workers at a closing factory.
Some of these AI trading systems are being built by startups such as Sentient in San Francisco and Aidyia in Hong Kong. In 2014, Goldman Sachs invested in and began installing an AI-driven trading platform called Kensho. Walnut Algorithms, a startup hedge fund, was designed from the beginning to work on AI. Infamously weird hedge fund company Bridgewater Associates hired its own team to build an AI system that could practically run the operation on its own. Bridgewater’s effort is headed by David Ferrucci, who previously led IBM’s development of the Watson computer that won on Jeopardy!
AI trading software can suck up enormous amounts of data to learn about the world and then make predictions about stocks, bonds, commodities and other financial instruments. The machines can ingest books, tweets, news reports, financial data, earnings numbers, international monetary policy, even Saturday Night Live sketches—anything that might help the software understand global trends. The AI can keep watching this information all the time, never tiring, always learning and perfecting its predictions.
A report from Eurekahedge monitored 23 hedge funds utilizing AI and found they outperformed funds relying on people. Quants, the Ph.D. mathematicians who design fancy statistical models, have been the darlings of hedge funds for the past decade, yet they rely on crunching historical data to create a model that can anticipate market trends. AI can do that too, but AI can then watch up-to-the-instant data and learn from it to continually improve its model. In that way, quant models are like a static medical textbook, while AI learning machines are like a practicing doctor who keeps up with the latest research. Which is going to lead to a better diagnosis? “Trading models built using back-tests on historical data have often failed to deliver good returns in real time,” says the Eurekahedge report.
Human traders and hedge fund managers don’t stand a chance, in large part because they’re human. “Humans have biases and sensitivities, conscious and unconscious," says Babak Hodjat, co-founder of Sentient and a computer scientist who played a role in Apple’s development of Siri. "It's well-documented we humans make mistakes. For me, it's scarier to be relying on those human-based intuitions and justifications than relying on purely what the data and statistics are telling you."
So what’s going to happen to the finance people who find themselves standing in front of the oncoming AI bus? Well, average compensation for staff in sales, trading and research at the 12 largest investment banks is $500,000, according to business intelligence company Coalition Development. Many traders earn in the millions.
