The Strategist

New study suggests that only intuition can help traders beat robots

09/19/2016 - 15:23

Traders with enhanced intuitive thinking earn more money and stay in the profession longer than others, according to a scientific study.

fred_v via flickr
fred_v via flickr
According to Reuters news agency, the efficient market hypothesis (EMH) suggests that all market participants have equal access to historical data on market prices, public information and private information. Thus, none of the market participants has advantages over other investment decisions.

The hypothesis also states that it is impossible to outsmart the market using only human performance, so that a man has no advantage over robots, which use precise algorithms in their work.

However, co-author of the new study and a former research fellow in neuroscience and finance at the University of Cambridge, and a former employee of Goldman Sachs and Deutsche Bank, John Coates said that physiological condition of traders has a serious impact on their success. "People really can compete with robots", - he says.

The study’s authors studied work of 18 highly experienced traders of the City of London. The researchers compared physiological activity of traders (hunger, pain and heart rate) with indicators of 48 men of other professions, but of the same age. It turned out that traders are more susceptible to changes in heart rate in their bodies than other specialists.

According to Coates, financiers pay too much attention to conscious reasoning. They have completely lost sight of what is happening between the brain and the human body. After several years of focusing exclusively on algorithmic trading (trading for a given algorithm), the industry is looking for an opportunity to improve performance of traders.

What will happen next?

The industrial revolution is characterized by automation of a number of works that have previously relied on manual labor. There is no doubt that it was a period of the most significant growth of people's livelihood. At the time, the revolution was unique in its case, and it is unlikely that we will be able to see this again.

AI can do for mental labor just the same as steam power had done for physical work. Already, there are the first victims of this sphere: dispatching taxis have no place in the world with Hailo and Uber; nature of a stockbroker’s work has changed thanks to introduction of high-frequency trading; sports and news stories will soon be composed by robots.

These changes are just beginning. In 2014, Goldman Sachs led a round of funding for $ 15 million for Kensho, a financial data analysis service that uses artificial intelligence techniques, which are beyond of the best trader’s control. It can work with such a huge amount of data that people simply feel powerless in front of it.

Kensho Analytics can be used in high-frequency trading. Take, for example, Athena company, which uses the instrument to instantly gain an advantage on the market - it's enough to make money, if you are trading billions of dollars. After such trading will be appreciated by the market in general, Kensho can give its algorithms to, say, Forbes, to replace its financial analysts. Most business reports look almost the same, and, if the data is available in a structured format, why waste time on people?

In general, these changes are good. If labor of millions of people will be replaced algorithms, they can do something better, number of working hours will decrease, and we get a step closer to the utopia.