How artificial intelligence is changing trading forever

7 June 2024 - 13:00

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Buying and selling stocks will become easier and easier: JP Morgan, Morgan Stanley, and other investment banks use generative AI to improve financial advice and decision-making processes.

How artificial intelligence is changing trading forever

Generative artificial intelligence is bringing a revolution to the trading industry, opening up new avenues to improve productivity and offer more personalized services. Studies indicate that generative AI has the potential to significantly increase productivity in financial services: banks such as JP Morgan Chase, Morgan Stanley, Bank of America and Goldman Sachs are already leveraging AI for deeper analysis and faster decisions, setting the stage for a new era in investing.

This article will explore how AI is revolutionizing the world of investing, highlighting key changes, emerging challenges and opportunities. We’ll start by examining how AI is transforming financial advice and the role of human advisors. Then we will see how AI is accelerating research and analysis in the banking sector. Finally, we will discuss the broader implications of this transformation, including the future of the banking industry in general. With a compound annual growth rate (CAGR) of 31.7% expected between 2024 and 2032, the AI market in banking is poised to become a driving force capable of generating historic changes.

AI in the banking sector
Source: Marketresearch

How artificial intelligence is changing the world of trading

Artificial intelligence is bringing a revolutionary transformation to the world of investments, with major investment banks embracing these technologies to offer increasingly advanced and personalized services. AI enables financial institutions to analyze massive volumes of data, identifying market trends and investment opportunities more quickly and accurately. This is redefining the way investors make decisions and manage their portfolios, offering an unprecedented level of precision and customization.

For example, JPMorgan Chase is working on “IndexGPT,” an innovative chatbot that will provide investment suggestions tailored based on the customer’s financial situation, marking a significant step forward in the use of AI in the financial sector.

Other banks, like Morgan Stanley, are using AI to improve the customer experience and simplify the jobs of financial advisors. Through the use of GPT-4, the company can offer faster and more accurate advice, reducing research time and allowing advisors to focus more on clients.

HSBC uses AI ethically to provide personalized and transparent banking solutions, leveraging technology to create new products and improve customer relationships.

Wells Fargo uses Large Language Models (LLM) to determine what information needs to be reported to regulators and how to improve business processes. Financial services providers, such as Bloomberg and Pitchbook, are also investing in generative AI technologies. Bloomberg launched “Bloomberg GPT,” a language model built on 50 billion parameters and adapted to finance, while Pitchbook developed a “VC Exit Predictor” that uses machine learning to predict the potential prospects of startup growth.

In summary, AI is changing the face of investing, opening up new opportunities for both banks and their customers.

All the benefits of AI for investors

Artificial intelligence is bringing a number of significant benefits for both institutional investors and private clients. Here are some of the most relevant benefits that AI offers:

  • Improved Risk Management: Institutional investors can use AI to analyze massive amounts of data in real-time, allowing them to identify hidden trends and patterns. This allows you to manage risk more effectively and react quickly to market changes.
  • Effective investment strategies: Thanks to AI, institutional investors can develop more sophisticated investment strategies, optimizing asset allocation to maximize returns. This allows you to make more informed decisions and improve operational efficiency.
  • Personalised advice: For private customers, AI offers tailor-made advice based on their financial situation. Chatbots like JPMorgan Chase’s “IndexGPT” can suggest investment opportunities and personalized strategies, facilitating access to advanced financial services.
  • Democratizing Investing: AI is making investing more accessible to a broader audience. Private clients can now get personalized advice and manage their portfolios with greater autonomy, reducing dependence on human advisors and democratizing access to investments.
  • Improved investment experience: With AI, private clients can access real-time analysis and support tools, improving their investment experience. AI also offers greater transparency and smoother interaction, creating a more engaging financial environment.
  • Productivity increase: It is estimated that the investment banking sector could benefit from an increase in productivity of between 27% and 35% by 2026. This could translate into an additional turnover of between 3 and 4 million dollars per employee.
Productivity increases thanks to AI
Source: Deloitte
Improvement in business operations thanks to AI
Source: State of AI in Financial Services, Nvidia
Banking sector growth potential thanks to AI
Source: McKinsey

Risks and future prospects of AI in investments

Although artificial intelligence is bringing numerous benefits to the investment sector, there is no shortage of risks that accompany its adoption. One of the main obstacles is regulation. Supervisors must find a balance between encouraging innovation and ensuring market safety and transparency. Existing regulations may not be sufficient to cover the unique risks introduced by AI, such as market manipulation or data misuse. Therefore, regulation must adapt quickly to the pace of technological change.

Another challenge is privacy and data security. AI relies on processing massive amounts of data, which raises concerns about protecting sensitive customer information. Financial institutions must implement robust security measures to prevent data breaches and ensure that personal information is treated ethically and in compliance with privacy laws.

Furthermore, the growing adoption of generative AI could alter competitive dynamics, as buy-side clients could become more independent and barriers to entry could decrease, increasing competition

Other concerns include the human role in decision-making: AI has the potential to automate many aspects of investing, raising questions about the future of financial advisors and the impact on jobs in the sector. However, AI can also be seen as a tool that allows human advisors to focus on more complex and strategic tasks, improving the overall client experience.

Jobs at risk in the banking sector because of AI
Source: Onimas

Looking to the future, AI in investing is set to evolve further, with significant developments expected in the coming years. AI adoption is expected to increase across the banking industry, with new applications leveraging machine learning and natural language processing to offer more advanced and personalized services. However, success will depend on financial institutions’ ability to address regulatory challenges, ensure data security, and strike a balance between automation and human intervention. The future of AI in investing is promising but will require a careful and responsible approach to ensure successful and sustainable growth.

Original article published on Italy 2024-06-09 12:44:00. Original title: Come l’intelligenza artificiale sta cambiando il mondo degli investimenti. Per sempre

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