The impact of AI in algo trading – financial sector

The ‘AI era’ is here, and it is spreading across a variety of industries. The financial sector is not an exception, and participants in the market and market analysts are pleased with the execution. A majority of financial organizations—57%—agree that AI will give them a competitive edge in the markets, according to a joint PwC and FICCI survey.

Participants in the sector are also making use of its capabilities for a variety of tasks, including automating processes, making informed judgements, and foreseeing development potential. Algo trading systems, which have previously proven beneficial to the financial markets as a whole for a long time, have also been actively investigated for AI.

AI as a supplement for algo trading

Algo trading has become a successful strategy as a result of the rising market competitiveness that has forced traders to alter their tactics. Since SEBI began to permit algorithmic trading in 2008, institutional investors, HNIs, and individual traders have flocked to it in record numbers. Unlike in the past, it is now accessible to individual traders, who use it to make trading decisions that are quicker and more effective. As a result, algorithms now have a role in 50–55 percent of deals. But the development continues after this point.

Algo trading has advanced since the introduction of AI. Informed trading judgements are made possible by it, in addition to helping with bulk data analysis. Furthermore, it analyzes patterns and trends that are challenging to spot manually, giving the user an immediate competitive advantage. Because of its capacity for learning and adaptation, it may shape itself to fit shifting market conditions, which benefits the trader. Algorithms for artificial intelligence (AI) as a whole have improved performance for market players. Additionally, the finance industry’s landscape is changing more quickly as a result of some realized AI use cases in algorithmic trading.

The fulfillment of traders’ needs

The growth of data availability and technology improvements have been major contributors to the proliferation of AI in trading. There is a wealth of market knowledge available to traders nowadays. Due to its capacity to precisely and quickly analyze this data, AI trading systems can be employed effectively since they let traders make wise decisions in real-time. As a result of the industry’s and its participants’ recognition of its potential and quick adoption of AI, numerous advantages have resulted.

Boosts productivity: The goal of AI in algo trading is to swiftly and accurately process vast amounts of data. Due to the ability to execute trades faster, which lowers costs and enables traders to make more informed judgements, the trading process is more efficient. According to a Boston Consulting Group analysis, the use of AI in trading can boost portfolio returns by about 1.5% while lowering operating expenses by up to 25%.

Elimination of human emotion: Human emotions are likely to influence trade decisions, which can be costly to profitability. Due to its objectivity and ability to base decisions only on data, artificial intelligence (AI) is able to make choices that are unaffected by the emotions of those making them.

Making quick decisions: AI has the potential to replace the traditional algorithmic trading cycle through dynamic decision-making. Decisions are more likely to be clever when employing AI-powered algorithms as opposed to just an Algo wheel based on benchmarks. It makes recommendations for particular settings and parameters based on historical data; these recommendations are dynamic and provide traders with the greatest outcomes.

Improved accuracy: In order to meet the growing need for quicker and more accurate trading, automation is now a necessity. AI in algorithmic trading includes the development of complex rules that assess market variables, such as volatility, order book depth, latency, and P&L.

Better risk management: Artificial intelligence (AI) has the ability to assess market data, uncover abnormalities, and identify potential dangers during trading, which can assist traders in managing their portfolios successfully. As a result of the reduced inaccuracy and elimination of human bias, risk management may be more successful and trustworthy.

With regard to high-frequency trading (HFT), loss mitigation, and intelligent order routing, AI has collectively aided traders in meeting their needs.

Lowered entry barriers

Improved trader productivity, less market effect, reliable execution performance, simplicity of use, and other characteristics are the main drivers behind the use of algos. Algorithmic trading is likely to be embraced by a broader spectrum of traders and investors as AI technology becomes more generally accessible.

New job opportunities

AI has had a significant positive impact on the financial sector, but there are some worries regarding the job market as well. Many job profiles will likely be replaced by AI, according to predictions. There are some bright spots, though. We can see how the application of AI has created new career prospects in fields like algorithmic trading, data analytics, and AI development. Furthermore, it is becoming increasingly important for new employment opportunities to have strong proficiency in programming languages, ML/AI, and big data analytics. There is a growing need for qualified individuals in India’s finance sector. There will be a need for those who can combine human experience with AI’s precision because AI still needs human input. Overall, some jobs will be automated, but they will be partially offset by new job opportunities. In the long run, any job losses brought on by automation are expected to be more than offset by new jobs developed as a result of the larger and wealthier economy these new technologies have enabled, according to a PwC AI study.

The age of AI

In the Indian algo trading industry, artificial intelligence is still in its infancy. However, it has a bright trading future and great potential for the financial industry. Brokerages are putting a lot of effort into using AI to reduce latency and make their platforms fail-safe against threats of outages and crashes, which can lead to huge losses. They are also investing in developing AI recommendation and analysis algorithms on their own platforms in an effort to stay competitive and provide cutting-edge trading solutions.

The increasing demand for market analysis, which is aided by decreased transaction costs, is expected to boost the expansion of the AI-based algo trading market in India. Trading solutions based on AI algorithms are more enticing to traders since they typically facilitate easier and quicker order execution. These systems have proven useful as they support fast and precise trade timing, automated checks on various market situations, and concurrent automated checks. So, a number of new use cases, business models, and employment opportunities are anticipated as the AI market develops in the Indian financial markets.