Artificial intelligence (AI) is reshaping financial markets with its latest advancements, offering both promise and challenges. While AI adoption can enhance risk management and deepen liquidity, it may also introduce opacity, make markets harder to monitor, and increase vulnerabilities to cyberattacks and manipulation. The question remains: will AI make financial markets more efficient or more unpredictable?
Artificial intelligence in financial trading
A recent Global Financial Stability Report sheds light on how Artificial intelligence in financial trading is transforming capital market activities. Through extensive consultations with investors, technology providers, and regulators, the report highlights how financial institutions are leveraging AI advancements and the potential impact on market stability.
For decades, hedge funds, investment banks, and other financial players have employed quantitative trading strategies. Automated trading algorithms have enabled markets to process large transactions in major asset classes, like U.S. equities, more efficiently. However, they have also been linked to incidents of extreme volatility, such as the 2010 “flash crash,” where stock prices plummeted and recovered within minutes. Such events underline concerns that automated systems could destabilize markets during periods of stress or uncertainty.
AI takes this automation to another level with its ability to process vast amounts of data, including textual information, almost instantly. Despite the buzz surrounding generative AI and other breakthroughs, their practical use in financial markets remains limited today. If we are at the dawn of an AI-led transformation, where might it lead?
Patent filings offer a glimpse into future trends. Since the emergence of large language models (LLMs) in 2017, the proportion of AI-related patents in algorithmic trading has surged from 19% in 2017 to over 50% annually since 2020. This signals a wave of innovation on the horizon, suggesting that AI’s role in financial markets is only beginning to unfold.
The journey of AI in finance is one of opportunity and caution, promising transformative efficiencies while requiring vigilance to mitigate potential risks.
