Driven by fee compression, growth of passive funds, increasing market complexity, and a rapidly changing competitive landscape, identifying and capturing alpha for active traders and asset managers has become more difficult than ever. The recent Aite Group Impact Brief profiles the reasons behind the evolution towards artificial intelligence in trading and how our firm’s Trade-Ideas - a trader-focused equity strategy development and stock analysis platform - has been leveraging artificial intelligence (AI) to help investment clients make real-time trading decisions.
Topics covered include overview of industry challenges:
Continued growth of passive assets under management. The last decade has seen exponential growth of passively managed mutual funds in the U.S. Total market size of passive mutual funds in the U.S. grew from US$844 billion in 2007 to about US$3.3 trillion as of May 2017, quadrupling their AUM over the past 10 years, while active mutual funds only grew 66% over the same period.
Hedge fund market continues to decline. Annual performance for hedge funds has dipped significantly since 2012 and liquidations have outpaced newly launched funds over the last few years.
Retail brokerage commissions drop to zero. The downward trend in commission rates to zero has elicited change among the discount brokers prompting an immediate focus on diversifying their revenue stream, a cost/benefit analysis of their legacy systems, and the further investment in customer-facing platforms, including adding fee-based investment advisory services, such as robo-advice platforms.
Burdens of legacy technology. Technology innovation could potentially help firms remain competitive in today’s tough market conditions. Unfortunately, legacy technology and systems have hindered implementation of new innovative initiatives, including forming partnerships with new technology providers.
The report also highlights the need for growth through constant transformation in this AI landscape. It is spurred by evolving market trends, technology advancements, competitive forces, and changing customer needs. Trade Ideas is offered as a great case study of how the firm has had to and continues to transform itself from an institutionally focused securities scanning tool into a sophisticated AI-driven decision-making platform targeting active traders, RIAs and asset managers.
The Aite Group believes key elements to future growth will be an ability to continue a focus on technology improvement, launch longer-horizon trading strategies, branch out beyond traditional equity-focused market expertise on the desktop and into other asset classes (such as FX) that have seen rapid adoption of electronification and market microstructure changes, as well as, additive mobile experiences.
Within this context, the path and decisions made to bring AI technology to traders and active asset managers highlights the opportunities for value creation and alpha generation for market participants. Illustrating the many management pivots needed to develop new investment solutions also provides great context on future plans for further developing AI technology into other meaningful products and services for the industry.
To read the complete Aite Group report, click here.
The Aite Group is a global research and advisory firm delivering comprehensive, actionable advice on business, technology, and regulatory issues and their impact on the financial services industry. With expertise in banking, payments, insurance, wealth management, and the capital markets, they guide financial institutions, technology providers, and consulting firms worldwide. They partner with clients, revealing their blind spots and delivering insights to make their businesses smarter and stronger.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.