Artificial intelligence has emerged as a game changer recently, due to the last 30 years of creation of unbelievably large amounts of data available on the Internet. AI can scan and analyse vast amounts of data, enabling it to replicate human-like intelligence and is on its way to surpassing it in the near future.
In the realm of capital markets, AI is revolutionising the way trading operates. Algo trading, also known as algorithmic trading, can and will harness the power of artificial intelligence to automate the trade execution process, as well deciding what and how to trade, fully. The use of AI in algo trading extends beyond mere automation. It will leverage AI’s analytical capabilities to study and interpret market data and related patterns from the exchanges, and execute trades based on the insights gained and opportunities spotted.
Also Read: Stock Market: How sentiment analysis transforms algorithmic trading strategies
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Impact of AI on algo trading
AI has played a significant role in making algorithmic trading more accessible to the masses. The emergence of open AI sources like ChatGPT, and open source AI models like Llama 3 has made AI technology available to anyone with an internet connection at a mere $20 a month or so cost. This has led traders to gain access to algorithms, creation of algorithms, that were previously only available to large institutions.
Additionally, many platforms have made it possible for traders to automate their trades without requiring coding knowledge, thanks to the contribution of AI in algo trading. Traders only need to apply their logic, in conversational format (without knowing any coding whatsoever), choose appropriate strategies like strangle, straddle, butterfly spread, etc., based on market conditions, and then automate their trades based on their set parameters.
With these algorithms in place, human intervention is no longer necessary, and multiple trades can be executed simultaneously. The significant benefit of AI in algo trading is that traders of all levels now have access to modern and advanced tools, improving their cost efficiency and risk management.
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Automation in equity and market research
In the near future, AI has the potential to revolutionise the field of research analysis. It can read corporate fundamentals data, market data, simulate market scenarios, and suggest trading strategies based on that data. This will democratise the way traders form their investment as well as risk management strategies. Traders can benefit from AI taking over the analysing and thinking part, allowing them to focus on other aspects.
Moreover, AI can suggest strategies based on unique trading goals and styles using customisable AI software. This advancement in technology can lead to more efficient and effective trading strategies, which will benefit the entire trading industry.
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Improved precision and accuracy
Algorithms powered by market research and AI can significantly reduce trading errors caused by emotions and impulsive decisions. Traditional trading methods rely heavily on expertise, intuition, and precision, whereas AI-powered algorithms eliminate the need for these factors and enhance the accuracy, efficiency, and overall performance of trades. These algorithms can be customised to fit various market situations, whether it’s a stable or volatile market.
By automating trades using AI, algorithms remove the emotional aspect associated with trading which is often the cause of mistakes. Additionally, AI can use market data to make predictions also, which a trader can use diligently in the algo trading.
Changing role of humans
It is indisputable that the role of human intervention in trading has been changing due to advancements in AI. Algo trading has taken over the majority of institutional and retail trading. It frees up humans to trade more, with wider discipline and better risk management. The role of professionals has been upgraded to mainly strategising, following regulatory compliance, and safeguarding the ethics around trading. AI will soon enough take over research and development, as colleagues of humans (sort of AI agents), as it demonstrates its ability to democratise machine learning, software development, and market scenarios simulations.
Also Read: Does algo trading offer guaranteed returns? Zerodha boss Nithin Kamath explains
New future of algo trading
The future of algorithmic trading holds immense potential for innovation and growth, likely to involve a partnership between human intelligence and artificial intelligence. This collaboration will enable us to explore the limits of what is achievable in the global financial landscape.
As we anticipate this remarkable revolution in AI and algorithmic trading, trading and brokerage firms must prepare for the challenges ahead. They should invest in research and development, develop advanced AI tools, train their workforce to work with AI, and foster a culture that supports innovation.
Additionally, firms must maintain regulatory compliance and ethical considerations as AI becomes more integrated into the financial landscape. This vision of the future highlights the exciting possibilities that lie ahead in the world of AI and algo trading.
Kunal Nandwani, Co Founder and CEO of uTrade Solutions
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Published: 04 May 2024, 10:46 AM IST
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