Capital markets have always been an early adopter of technology. In the quest for
‘alpha’ – a street way of characterizing any sort of investing advantage – institutional investors, and investment professionals have rarely shied away from trying new things.
AI is not a new concept anymore. Some might even say it’s overused. But when it comes to investing, AI can probably still do a lot more than it has done thus far. While AI is being used for identifying patterns in data, a lot more can be done in areas such as Risk Management. But where, I believe, AI will really make an impact over the next three to four years, is in the retail investor space.
Here are some ways how this is likely to unfold:
Automation of research
For most retail investors, finding the right kind of decision-support intelligence is one of the toughest parts of maintaining a balanced investing profile. Their problem is that they are constrained by their ability to assimilate and understand financial data. There are thousands of data sources out there that could easily end-up overwhelming a retail investor. Of course, most of the reliable data is also very expensive – usually out of reach of the average small investor.
AI can change all that. AI has the ability to classify data by its usefulness, relevance and timeliness. Crunching tons of heavy data and creating simple investing insights would be of tremendous value to investors.
Once data is converted into intelligence, it’s only natural that it be personalized while being delivered to an investor. With the advancement of social media, we know what may work for one kind of person may not work for another kind. People’s interests, risk profiles, investing horizons and net worth are all very different from one another.
The good thing about using AI for retail investors is that it can be used to offer personalised intelligence to a large scale of investors – all at the same time.
One of the big deterrents in getting a large number of investors to use a rapidly evolving investing system is the issue of onboarding thousands of users a day. With comprehensive KYC (Know Your Customer) requirements to be met, in many markets users have to upload personal videos and identity documents that are then validated for compliance requirements. Done humanly, this creates a large backlog of unapproved investing accounts whenever there is a surge of new investors in the market.
This is exacerbated further when new markets open-up – like Indians or Chinese investing in the US or UK markets. Smart use of accurate AI would be a great help in automating KYC procedures.
Investing in unfamiliar areas
As investors, we often get enamored by things we don’t understand. Without analyzing enough information, without spending enough time building new knowledge, and often without seeking the right advice we end-up investing in things which seem trendy.
With AI, it’s possible to detect automatic patterns in securities and markets. And it’s possible to, for instance, “tag” securities with relatable intelligence. For example, Tesla is an automotive company, an energy company, a tech company and regulation-impacted company – all at the same time. A layman may not understand the Tesla stock based on its fundamentals but is quite likely to understand at least one of the contexts that Tesla is described in.
The ability run significant, yet minimalistic, experiments
As tech infrastructure gets commoditized, running AI-based experiments is becoming cheaper. At the same time, investing in totally new markets – such as investing from Asia into UK or US, or vice-versa – is also easier today than it was a sometime ago.
This can help an enthusiastic retail trader create and run algorithmic experiments without selling the house. And the fact that this can be done in a new market, makes the whole idea all the more interesting because key market parameters like volatility and currency can be taken into account while building models.
AI can truly democratise investing for retail investors by creating a more level playing field and by helping them manage their investing lives more easily.
Vinay Bharathwaj is founder and managing director of Stockal