The Ever-Changing Role of Artificial Intelligence in the Stock Market

With the emerging influence of artificial intelligence in professional spaces, many industries, including that of finance and investment, have had to adapt accordingly. With artificial intelligence arriving in its full force to the stock market, how investors and financial analysts interact with the market has evolved, and in many ways become more practical and automated.

Algorithmic trading–where trade decisions are made according to previously recorded data and recorded patterns–is becoming increasingly prevalent in finance; the global algorithmic trading market is expected to expand at a compound annual rate of 12.2% until 2030. This is because algorithmic trade relies on algorithms programmed by humans. Yet with the developments of AI–which excels in identifying extrapolating complex and multidimensional patterns–these algorithms can now predict market behaviors by decoding more complex data. As AI and machine learning become more advanced, one can expect algorithmic trading to improve at interpreting and breaking down large amounts of data. More and more investors will rely on algorithms to make financial decisions. One might wonder what will happen if and when computer systems dictate and manipulate all or most of the transactions placed in the stock market.

One of the principal benefits of relying on artificial intelligence in the investment world is that it makes rapid financial decisions by analyzing complex patterns that might be undetectable to humans. Moreover, the decisions taken by AI are entirely rational and based on statistics and information, and do not consider emotions and other biases like humans do. In addition, another enhancement is that artificial intelligence maximizes global trade availability and opportunities because these algorithmic systems operate 24/7.

Another area in which AI is changing the financial industry is with exchange-traded funds (EFTs), which are passively managed, do not require active monitoring, and are manipulated through computer systems. There are now a growing number of AI-managed EFTs. Interestingly, many AI-controlled EFTs appear to outperform traditional index funds. An example of this can be seen with the Artificial Intelligence equity exchange-traded fund (AIEQ), which, powered by IBM AI’s Watson, has consistently surpassed the S&P 500 in results. As AI technologies keep developing, their influence over transactions in the stock market will likely become more prevalent. It will be interesting to see the impact of stock market price levels as the demand for AI-controlled EFTs over traditional stocks keeps rising.

The effects of AI described above are affecting the investment workforce; in many firms including BlackRock, AI financial advisors are replacing humans in actively controlled equity funds. With information becoming increasingly democratized and accessible through the internet, and since actively managed funds rely on mass quantities of data, some firms believe that humans fall short of artificial intelligence when handling these active funds. Like in many other industries, there is a fear that the development of artificial intelligence technologies will lead to increased unemployment in the investment world. Still, there is a belief that efficiency and sustainability will be maximized in a hybrid situation where both human and AI advisors can coexist, for although AI is generally more efficient and cheaper than human labor, there is great value–and perhaps more societal trust–in human productivity over complete digital control.