We all know that computerized and automated trading has had a huge impact on short-term trading, simply by exploiting the speed of computers to react to market changes faster than humans can (or other, slightly slower computers); but could artificial intelligence have an effect on long-term trading?
AIs offer a new form of investment technology that, for the first time in 4,000 years, could give investors a truly game-changing edge that doesn’t rely so heavily on speed.
AIs will be able to consider — just as AlphaGo did for Go — deeper risks and even uncertainties of future markets, future growth and future scenarios and, in turn, provide investors with tools that can dramatically increase long-term returns. Looking out over a longer time horizon, an AI could learn to unearth factors that are truly material for an underlying company or asset and then base investment recommendations on the performance of those characteristics. It may take time for these performances to be realized, but that’s not a problem for long-term investors.
Imagine then that these inferential tools become so powerful that asset managers stop relying on trading technologies for their edge and begin to rely on inferential technologies that extend the average holding periods of investments. Crazy? Well, as my postdoc at Stanford, Dane Rook, occasionally reminds me, we are surely nearing a hard limit in the speed of data transmission: Data can’t travel faster than the speed of light. However, is there any such equivalent upper bound to the inferential depth that is possible? It’s hard to say, but with enough data it may not be so!
The rise of long-term robots may be upon us, and that could be a catalyst for investment time horizons to reverse their current downward trend. That’d be a very good thing for the future of finance and, indeed, capitalism.