If the role of investment banking is to optimally allocate capital, then part of that job is research. Think Andrew Left's exposing fraudulent Chinese tech stocks, or the Lumber Liquidators controversy. Algorithms can augment this work, but cannot replace it.
Why do traders in investment banks feel their jobs are immune from AI, etc?
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Re: Why do traders in investment banks feel their jobs are immune from AI, etc?
#82Due diligence on the financials of a company (what investment bankers are supposed to do) is actually really hard to get right with the algorithms we have today. Much of the data and insight compiled by an I-banker today does not exist in an easily parse-able form for automated algorithms, and a substantial amount of the computation relies on common sense knowledge.
More to the point, most investment banking valuations are just guesses and understood to be as such. Estimating discount rates and growth rates in particular are very much gut-driven and aren't expected to be precise, no matter how complex a model the analyst comes up with. There's only so much you can ask a kid 10 months out of Harvard econ to do, no matter how many pounds of cocaine and borrowed Excel sheets they h…
Not to mention the difficulty of an algorithm that can come up with a convincing explanation for why last quarter's predictions were way off but these ones should be fine.
Re: Why do traders in investment banks feel their jobs are immune from AI, etc?
#83There seems to be some confusion going on about investment bankers and traders in the discussion.
Trading has been changing significantly since the 'big bang' when trading went from pits to electronic. From there on in you see the evolution of algorithm / program trading. This area has been using quants for decades at this point. There are a good few big names brands out there that are known for being 'algorithmic heavy', Man, Citadel, DE Shaw come to mind (I"m a few years out of date). That whole field has been open to introducing automation / algorithms to create a business edge and will probably continue to advance because its good for business. The profile of traders has also changed (Barrow boys versus PhDs)
Then I guess on the other side is investment banking such as m&a, equity and debt capital markets. Generally there its relationship based , juniors work on pitch books which from what I saw / heard were generally overlooked. This is potentially a lot harder to automate away. Then the bank would try to pull in some rain makers or grow them internally to land big deals. Usually these opportunities open up because their clients (Other companies) have learnt to trust the organization or at the least learn to expect a certain behavriour when enlisting their services.
Re: Why do traders in investment banks feel their jobs are immune from AI, etc?
#84For around eight years my primary job function was to put investment bank traders out of a job, by automating what they did. There were still humans in charge of the algorithms, but they moved more towards Python programmers than market traders. Many of the "old-style" traders bitched about what we did, and most moved jobs to banks that were less advanced. (I was in the interest rates line; typical trade size is $10M…
I am curious about how the old-style traders actually did their jobs. Did they base their trading decisions on data or instinct?
Knowledge and experience of how the market reacts to other movements. I guess you could call some of that "instinct".
Of course, they did know more than the machine did in certain situations, but not enough to make up the cost.
Re: Why do traders in investment banks feel their jobs are immune from AI, etc?
#85because traders are used to seeing such predictions fail. Reuters was trading FX electronically since the early 1990s. At the tier one IB I worked for the IT budget was 500m USD a year (across products), and that was in 1997! Huge resources were thrown at automation. However, to this day, large trades in FX (> 10m USD notional) are still almost exclusively performed by humans over a telephone or over the bloomberg me…
Machine learning is "learning from data." It is not the assumption that there are no dynamics, and that the future will simply be a repetition of the past. To the extent that the future is predictable, learning from data is the best that can be done.
The reality is that speech recognition, language translation, face recognition, object classification and detection, semantic segmentation, speech and image synthesis have improved by extraordinary leaps and bounds in recent years. If we used the logic that past failures inform a confident belief that future success in a challenge will inevitably fail, then we should've bet heavily against Alpha Go defeating one of the most accomplished human Go champions in the world. Self driving cars seem like a sci-fi fantasy until they become a mundane reality.
There's an irrational arrogance to human beings in general, and Wall Street types in particular, regarding the specialness / non-reproducibility of their intelligence. It's not unlike the belief that people had that organic molecules were somehow special, "vital," and not synthesizable from base elements.
Certainly, there's a long way to go to replicate the capabilities of a human brain, but I don't think we should exaggerate or fetishisize the human power to estimate and mitigate risk. We've seen many spectacular failures of that in recent years.
Re: Why do traders in investment banks feel their jobs are immune from AI, etc?
#86I just think that if AI could beat them, they were already replaced. Any innovation in trading is automatically implemented. May be this will be possible in the future but it doesn't depend only on deep learning techniques and having huge samples for learning because they have both.
AFAIK the bulk of investment bankers are beaten just by chance as this article suggests: http://www.automaticfinances.com/monkey-stock-picking/
The bulk of investment bankers are not picking stocks for funds. In the field of fund management, there are some people doing this, and it is a very common trend that passive indexes do better than the active funds - it is true.
In the field of investment banking trading (which is mostly market making) the amount of automation varies by asset class: very automated for some asset classes like fx, equities, much less for more illiquid asset classes like credit, commodities, bespoke products.
As well, senior traders operate as the 'business' making more decisions than pricing of products. They make the business decisions often judging legal, compliance, accounting risks. (and not always correctly.).
e.g. do you accept to trade with a Dutch counterparty who wants to trade against your German legal entity knowing that you can only hedge the position in London? What is the risk between the two legal setups? What premium should you charge for those risks?
Do you trade the very large size that the counterparty wants, knowing it takes you over your balance sheet position limit - can you get approval for this from your senior management? Can you offset the position in the market without it moving against you? What premium do you charge for this?
Re: Why do traders in investment banks feel their jobs are immune from AI, etc?
#87Earlier quoted context omitted.
The salesman is incentivized to screw you. They work on commission so the faster they can move houses, the better. Real estate agents are screwing both the buyer (feed you bullshit to get you to buy) and the seller (convince to back off of higher prices because the 0-15% difference in price isn't worth the weeks more effort on their commission).
Like a restaurant though, if they were bad at their job they wouldn't attract new clients. Under a HN analogy if they screwed clients they'd have a 0 rating and lose future clients. The assumption you have is they are simply a market matcher but they're offering more than that. Their incentive is to get the highest possible sale price in the shortest amount of time and a good reputation. That high price has to also b…
This is not true. Some professions are based on screwing the current client and moving on to the next one. How many times do you get to buy a house? This is why most people use an agent to sell their house. They can lie without seeming they're lying (sorry was unaware of xyz...that's what the owner told me)
The incentive for the agent is actually highest cash in down payment because they don't want to deal with the bank to get their money plus they get to keep the down payment if the buyer pulls out.
Re: Why do traders in investment banks feel their jobs are immune from AI, etc?
#88Well, an equally good question is why do programmers feel their jobs are immune from AI, etc.?
Re: Why do traders in investment banks feel their jobs are immune from AI, etc?
#89because traders are used to seeing such predictions fail. Reuters was trading FX electronically since the early 1990s. At the tier one IB I worked for the IT budget was 500m USD a year (across products), and that was in 1997! Huge resources were thrown at automation. However, to this day, large trades in FX (> 10m USD notional) are still almost exclusively performed by humans over a telephone or over the bloomberg me…
Machine learning is "learning from data." It is not the assumption that there are no dynamics, and that the future will simply be a repetition of the past. To the extent that the future is predictable, learning from data is the best that can be done. The reality is that speech recognition, language translation, face recognition, object classification and detection, semantic segmentation, speech and image synthesis ha…
Would Alpha go beat the same human on 17x17 or 21x21? Or even 13x13?
Let's not get started about self-driving cars…
Re: Why do traders in investment banks feel their jobs are immune from AI, etc?
#90>No amount or greater sophistication of the algorithmic structures listed above, can replace genuine human nuance, interaction and trust. I don't think this is true. Not at all.
Me neither. How much of the genuine human nuance is present in today's financial services or any commission driven industry - next to nothing. Every agent/broker is motivated by the highest commission he/she can make, nothing more.
I can reasonably say that you make this comment because you know nothing about the business logic of trading desks.
A trader is not necessarily a sales or a broker, though. Nor is he a quant, or a dev. People rarely imagine how many different jobs are involved in the trading job, and how rich the business logic is. At my shop, traders are the piece that connects all of the jobs in the value chain.
I believe, currently, the business logic can be improved locally by learning systems (and it is), but there is no public example of an industrial learning application encompassing a scope comparable to what the usual trading desk handles. Sure, there are many inefficiencies ; traders work on heuristics, afterall. But I don't believe we have the necessary horizon to aptly predict the end of traders, because I don't see how we could make AIs with a better efficiency.