Artificial Intelligence in Investment Banking – The Technological Revolution

June 2, 2018

If there’s a word that will capture the zeitgeist 2018, it’s Artificial Intelligence. Not just the concept, but its application and consequently our reaction to being usurped by our own creation. Siri was the beginning, the most simple of AI. But it’s crisp ‘robotty’ voice meant we knew it was an algorithm. The launch of Google Duplex had critics picking up pitchforks and making for the witches hut. They couldn’t take the ‘hmms’ and ‘ahs.’ The possibility that human interaction might never be restricted to, well, humans. What did they think was going to happen? That we could get rid of the driver and not rid of the personal assistant.

It was a natural progression I would think since AI is making itself felt across the spectrum of our daily activities. Transport- Tesla and Uber are developing self-driving cars. Your shopping- Amazon is replacing human cashiers with A.I. in automated grocery stores. And how can we forget how  Facebook mines our personal data to help advertisers know what you’re going to buy next. It’s safe to say that the future of war to is going to be AI, and the 21st century will be known for its technological arms race. Global spending on artificial intelligence and machine learning is predicted to grow from $12 billion in 2017 to $57.6 billion by 2021, and investments will follow.

But what about Finance?

Finance is still away yet in the full understanding application of AI but let’s look at some numbers. According to an article in MIT Technology Review, the US equity trading desk at Goldman Sach’s New York headquarters employed 600 traders. Today they employ two. 598 traders have been replaced by automated trading programs and they are supported by 200 computer engineers. Apparently, 45 percent of the revenue from cash equities comes from electronic trades. Complex algorithms are being built that can understand what a trader would do, not just across equities but even asset classes like currencies and credit. AI has already been used by hedge funds in stock trading. Goldman Sach’s new consumer lending platform, Marcus, is entirely run by software, with no human intervention. What about Accounting? E&Y said that the graduate recruitment for auditors and accountants could fall as much as 50% in the next four years, because of AI.

What about Investment Banking?

Well, what is a DRHP? It’s nothing but a risk document that lists out everything that can possibly go wrong with the company. I can’t see why a Bot can’t do that. Or in fact build a financial model with three scenarios, or even a Pitch Presentation because so much of these templates are becoming standard.

But how can AI replicate nuance? How can it ever know when to the high ball a Private Equity player during a deal syndication?

Investment Banking is much too dependent on human emotion – winners curse wouldn’t exist if all our actions were rational, and therefore AI will never make headway in Investment Banking. Maybe a ‘bot’ won’t be a rainmaker anytime soon but it’s safe to say ‘soon’ is not ‘never’.

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