I have been studying Artificial Intelligence (AI) for Capital Markets for ten months now and I am shocked everyday by the speed of evolution of this technology. When I started researching this last year I was looking for the Holy Grail trading tools and could not find them, hence I settled for other parts of the trade lifecycle where AI solutions already existed.
Yesterday, as I was preparing for a speech on AI at a conference, one of my colleagues in Tokyo forwarded me an Asian newswire mentioning that Nomura securities, after two years of research, would be launching an AI enabled HFT equity tool for its brokerage institutional clients in May – here it is: the Holy Grail exists, and not only at Nomura. Other brokers have been shyly speaking about their customizable smart brokerage, e.g. how to use technology so that tier5 clients feel they are being served like a tier1. Some IBs are working on that, they just don’t publicly talk about it.
Talking to Eurekahedge last week I realized that they are tracking 15 funds that use AI in their strategy, I would argue there are even more than that because none of those were based in Japan (or Korea where apparently Fintech is exploding as we speak).
All this to reiterate that AI is an exponential technology, ten months ago there were no HFT trading solutions using AI, and we thought they were a few years away but no, here they are NOW. And the same with sentiment analysis, ten months ago they were just a marketing tool, now they are working on millions of documents every day at GSAM. Did I forget to mention smart TCA that’s coming to an EMS near you soon?
Stay tuned for more in my upcoming buy side AI tools report.
- Their distance from the end consumer of their product (i.e. the retail investor), which has given them limited pricing leverage as well as something of a tin ear for investor needs
- Brutal price competition in the ETF space itself
- A build out from an existing non-discretionary platform. See Schwab’s Intelligent Portfolios and TradeKing Advisors as examples.
- Automation for the advisor, e.g. Upside Advisor (now part of turnkey asset management provider or TAMP Envestnet), Jemstep Advisor Pro and the institutional arms of Motif and Betterment.
- Partnerships, such as the alliance between Betterment and Fidelity, or the Jemstep Advisor Pro and TD Ameritrade integration.
- Costs of customer acquisition are high. At what point are the venture capital backers going to want their more half billion dollars back?
- Revenue models are low. It’s hard to make money when you are charging less than 25 bps on assets.
- Barriers to entry are few. Combine the ability to code and decent investments savvy and you have got the skeleton of a robo. Then it’s off the see the deep pocketed panjandrums of Silicon Valley.