Will Artificial Intelligence Dominate Trading? | Dave Coker – DataDrivenInvestor





DataDrivenInvestor
Oct 8
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Not bloody likely
We often see posts on Social Media by individuals who claim to have invented a Bot that can trade. Almost always the poster declines to mention specifics of the algorithm they have implemented, resorting to using vague and emotive terms such as “Artificial Intelligence” or “Machine Learning”. Frequently they’ll also post claims of profits, but these are what we call “unaudited financial results” . In other words, we have to take the poster’s word of their trading Bot’s skill. Regardless, these claims cause many people to
someday. But how seriously should we consider this threat? I’m a trained Wall Street Quant with a deep and broad mixture of technology and finance skills. I built expert systems at AT&T Bell Labs in the late 1980s, then moved to Wall Street where I programmed quantitative models, initially focusing on the valuation of Fixed Income Securities, Equities and Structured Products, and later various applications of Risk Management e.g., Market Risk, Credit Risk or Operational Risk. I spent the greater bulk of my Investment Banking career on or close to trading floors, so naturally when I hear someone claim to have invented a trading Bot,
before I accept their claim. Unfortunately, those posting on Social Media either can’t or won’t provide us with audited results. But we do know there are five Exchange Traded Funds, ETFs, which are managed by Artificial Intelligence. And because ETFs are publicly listed vehicles, US Securities Laws require full disclosure. Every quarter I review the performance of the AI Powered Equity ETF, or AIEQ. The chart below shows the performance of AIEQ
compared to The S&P 500 and the Nasdaq, for four different time periods. Over the past one year we see AIEQ — “The Bot” — has underperformed both indices. Year to date The Bot has beaten the QQQ but trailed The S&P 500. Over the past three months The Bot underperformed both the S&P 500 as well as the Nasdaq. And finally, over the past month The Bot has once again underperformed both the Nasdaq and The S&P 500. AIEQ uses
and because its algorithms are proprietary, we don’t have full transparency into The Bot’s decision making process. In other words, unlike a human manager who we can query, we can’t ask The Bot why it entered into or exited a specific position. But by
we can gain some insight. The Bot’s top holding, Five Below (FIVE), runs discount stores across The United States; this seems like a timely stock to own. We see The Bot also has positions in Antero Resources (AR) and Sunnova Energy (NOVA); again solid choices since we know the energy sector is booming. Moderna (MRNA) seems like a pragmatic choice should winter lead to increased demand for Covid vaccinations. And finally Builders Firstsource (BLDR) is focused on supplying building materials, with many trailing metrics suggesting the stock is undervalued. But even though
a pragmatic portfolio, it has seriously underperformed when looking back over the past year. This has been a tumultuous year, with large numbers of actively managed portfolios underperforming passive indices such as The S&P 500 or The Nasdaq. But since
how has The Bot performed since its inception? The chart below compares its performance to The S&P 500 as and The Nasdaq.
You’ll see The Bot has out performed the S&P 500, but lagged The Nasdaq. This is consistent with metrics the last time we evaluated the Bot’s performance
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It’s important to keep in mind AIEQ was created and is run by a well capitalised listed fund, with ample financial resources and expertise. Any results we’ve presented must be adjusted to reflect AIEQ’s management fee; currently this is 0.75% per year, which effectively erases any gains it might have made over passive indexes. So clearly, after reviewing this data, both for the current and previous quarter, it’s pretty safe to
any time soon. We know this is true because a major Wall Street listed entity hasn’t been able to build a Bot that can consistently outperform passive indexes.
And the claims made by posters on Social Media?
Draw your own conclusions.
I hope you enjoyed this article. If you are interested in Financial Independence, Finance, cryptocurrencies and the markets, please considering sponsoring me, at no cost to you, here
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Retired Investment Banker, Deutsche Bank, ABN AMRO, Moodys, now University Lecturer in London. Financially independent student of markets. American / British.
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