The impact of AI on trading

Hi,

The other day I was catching up with a previous co-founder of mine on one of my past startups and got asked why we can’t just let some of these AI chatbot tools trade for us.

The short answer is of course we can. The issue is that the outcome might not be what you expect.

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AI has had a presence in the financial markets in various forms long before it broke into the mainstream earlier this year with ChatGPT.

A couple of years ago I was consulting a private equity firm on implementing an AI that would replicate the decision making of their main investor. It was to serve as contingency in case the guy got hit by a bus (it was his suggestion to replicate him, not the firms) and as a bonus asset for junior investors to learn faster.

Large funds have been building their own advanced predictive models for years and algorithmic and quantitative trading are two full new religious camps next to fundamental and technical analysis.

All this is to say that if AI has an impact on the market we are already seeing it.

What we are seeing is that the market is just as irrational as it has always been and that is the beauty of it.

The market is one big balancing act. The second someone finds an unfair advantage, others will copy, and eventually this becomes the majority of trades. What happens then is that it is not an advantage anymore and something else will be discovered. This is also why sticking to a single method or algorithm does not work in the long run as the market cycles.

This is super good news for you because then you don’t have to worry. Keep focusing on finding your own edge and unfair advantage. Don’t compete where you can’t, like on time with machines, and go play where things are in your favour, there are plenty of sections, niches and market pockets.

Even better news is that the AI tools are getting cheaper to run and more accessible so that regular people like us can benefit as well.

I won’t be asking ChatGPT what to invest in, but I do use it/her/him extensively to generate ideas and brainstorm as well as for research. If you haven’t embraced AI yet I strongly suggest you play around a bit. Huge productivity boost.

Maybe a weekend project?

Have a good one,

Chris

Originally posted 29th September 2023 on ElliottSays.com

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