By Michael Sprachman, VP of Brokerage Trading Platform, Devexperts
In general, the goal of trading is to make a profit. Its process is tied to decision-making and technical analysis based on statistical data. The analysis and search for market patterns can be performed by humans – and increasingly by technology, like artificial intelligence.
For example, institutional investors have already been utilizing trading robots with a focus on tracing price movements for years: In 2020 over 60% of trades exceeding $10M were executed using algorithms, according to a JPMorgan study. Furthermore, the algorithmic trading market is expected to grow by $4 billion by 2024, bringing the total volume to $19 billion.
The numbers look significant, but it’s even more important to pay attention to the dynamics.
What makes market players use trading robots and algorithms at an increasing rate? Can AI handle any other functions for different market players – like retail investors, some of whom just began trading over the past couple years?
Over the past few years, the markets withstood massive challenges worldwide and experienced growth for several reasons:
- Surge in remote work due to the COVID-19 pandemic: 10.8 million people who were unemployed in the fourth quarter of 2020, which was 4.9 million more than at the end of 2019, according to the Bureau of Labor Statistics. Many of those people started looking for a new source of income.
- Increased telecom and internet coverage worldwide has led to a major influx of new traders using a variety of online trading platforms.
- High market liquidity and low transaction costs made trading, especially through mobile apps, accessible to anyone.
However, by Q3 2021 the total equity volume from individual US investors fell from 24% to 19%, according to Bloomberg. This is likely because of a combination of causes which include high market volatility, and the need for more time-sensitive analysis and market situation monitoring tools.
When it comes to attracting new traders, lowering the barrier to entry is crucial. A new trader’s success can depend on the usability and features of a trading platform but combined with their knowledge of the industry and time required for trading.
As a result, a broker obtains a competitive edge by reducing either the required skill level or time spent on trading.
To save essential traders’ time, standalone trading robots help copy and maintain user-defined strategies.
Production of personalized up-to-date educational content can also be beneficial if it takes into account the latest market events. To make it easier, brokers can leverage generative language model solutions that use AI to generate unique content based on trader’s interests.
Rapid AI development hasn’t been left unnoticed by retail market participants, either. Both advanced and new traders in the financial markets likely experienced how AI beats humans in solving specific tasks.
Particularly in retail trading though, it is important to have the proper tools, not just to maximize the possibility of profit, but also minimize the risk of failure. AI innovative technologies allow them to analyze massive amounts of data effortlessly, track performance in real-time, and make wiser trading decisions in the future.
And as we have seen, AI helps to unlock even larger datasets from structured resources – and has the possibility to unlock resources from unstructured sets, such as social media. For example, AI based technical analysis tools are currently used to provide stock ratings including buy/sell/hold indicators based on historical performance, tailored to sector and industry benchmarks. Others provide insight into price targets, forecasting and peer comparisons.
AI won’t be the “silver bullet” for any given case, but we’ve seen that the application of AI and machine learning has already improved the collection and use of data, and in turn will continue to contribute to more accurate forecasting and the identification of more relevant market trends. And over time, the continued gradual evolution of automated and AI-powered trading platforms will continue to fuel an increase in market participation.