Major financial services (FS) players have long been applying algorithms to make equity trading more efficient. Now, however, JPMorgan says it has developed an artificial intelligence (AI) system to take such automation to new heights.
The bank has been testing its AI program, LOXM, since Q1 2017 in Europe, and plans to roll it out across its Asian and US operations in Q4 after trials proved successful. LOXM was trained on billions of historic transactions to enable it to execute equities trades at maximum speed and at optimal prices, and to offload large equity stakes without causing market swings. LOXM delivered significant savings and far outperformed both manual and automated existing trading methods in trials, according to JPMorgan.
Here is how JPMorgan says LOXM outdoes existing algorithmic trading:
- It is being applied directly to trade execution. JPMorgan claims it is the first major bank to apply AI technology to real-time trades, as opposed to applying the technology only to post-trade allocations like many of its peers. Although JPMorgan may well become the first of its class to get such a sophisticated program to market, its main rivals could be developing their own solutions without making it public. These players may now bide their time to see what can be learned from LOXM once it is deployed, and possibly improve upon it, further driving innovation in this space.
- It could be applied to client management. Although LOXM will be applied to trade automation initially, it may later be trained to thoroughly familiarize itself with individual end clients to take their behavior and reactions into account when executing a trade, says Daniel Ciment, head of global equities electronic trading at JPMorgan. He adds that delegating such customization to a machine means personalization can be achieved more efficiently and at a larger scale. However, if LOXM develops such skills, JPMorgan may risk alienating some of its end clients, as research shows that most consumers still don't trust technology with major financial decisions. Banks will have to consider how to mitigate this outfall to ensure their automation efforts add value.
JPMorgan's announcement is further evidence that automation using AI in financial services is inevitable. Financial institutions (FIs) are increasingly looking at how to deploy AI to reduce their operational costs as the technology becomes increasingly adept at crunching vast amounts of data and learning from its experiences. And as more of these players reduce their outlays, the pressure on their peers to do the same is intensifying. That a player as powerful as JPMorgan — the world's biggest investment bank in revenue terms — has committed so heavily to the technology will now make the situation even more critical for its rivals. Moreover, if LOXM does deliver the benefits JPMorgan claims it can, this will not only push FIs to automate using AI, but to do so to higher standards. This means FIs that haven't yet turned their attention to large-scale AI deployment cannot afford to delay much longer.
Sarah Kocianski, senior research analyst for BI Intelligence, Business Insider's premium research service, has put together a detailed report on the evolution of robo-advising that scopes the current market for robo-advisors, providing an updated forecast through 2022. In addition, it explains the different types of robo-advisors emerging, details how startups and incumbents are working to ensure the success of their products, and outlines what will happen to the market over the next 12 months.
Here are some of the key takeaways from the report:
- BI Intelligence forecasts that robo-advisors — investment products that include any element of automation — will manage around $1 trillion by 2020, and around $4.6 trillion by 2022.
- Startups offering robo-advisors are struggling to acquire AUM due to overcrowding in the global robo-advisory market and lower than expected customer uptake.
- Incumbents are rolling out their own robo-advisor products, a trend we expect to pick up in the period to 2022.
- North America remains the leading robo-advisory market, but we expect Asia to catch up and outpace the region in terms of AUM managed by robo-advisors in the period to 2022.
- There will be a winnowing of the startup robo-advisory market as only a few firms remain stand-alone, while incumbents looking to launch their own products will profit from purchasing the technology of startups that have fallen by the wayside, at low cost.
In full, the report:
- Provides a forecast for the volume of assets robo-advisors will manage by 2022.
- Outlines the current robo-advisory landscape.
- Explains how startups with robo-advisor products are evolving their business strategies.
- Provides an outlook for the future of the robo-advising industry.
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