The latest level of quantitative trading is now working on the productive use of artificial intelligence, or AI for short. In this approach, the AI in the computer learns from its mistakes.
A normal computer just takes in code and formulas, waits for certain conditions to occur, and then takes action as defined by the code used. An AI computer is given general instructions of performance but then continually does two things: 1) seek the best of multiple ways to achieve its goal, and 2) learn from errors and how to improve its probability accuracy. This latest level of quantitative trading is key to anticipating human behavior trading in the market, and it is just now trading consistently in few corners in the last year with an entirely automated brokerage presence.
The Rise of the Artificially Intelligent Hedge Fund
Clearly, a working computer as a trader has its advantages, especially in day trading when small changes by the second or minute can make huge differences in large bets and large profits. In fact, it was computer-driven trading that caused a May 2010 Dow drop of 1,000 points and then a return a few minutes later. Unfortunately, those who responded to the computers' first move in the initial drop lost their shirts when the electronic trading returned things to previous levels a short time later.
In a recent article, WIRED.com said, "The machines, however, are getting smarter. Each day, after analyzing everything from market prices and volumes to macroeconomic data and corporate accounting documents, these AI engines make their own market predictions and then “vote” on the best course of action."
"If we all die, it would keep trading." BEN GOERTZEL, AIDYIA
So why play with fire via quant trading machines? Much has to do with how AI trading works; it thinks for itself, learns from mistakes, and maps out the best probability of trading among thousands upon thousands of math possibilities in the moment. It's a combination of a human aspect of learning and a computer's ability to do lots of statistics really, really quick. And because a computer can do that kind of work in seconds, it right now stands at a huge advantage of getting things right more often than human traders. That makes a quant fund statistically the safer bet for investment, no surprise.
Read more about the different types of Artificial Intelligence (AI) and the names to watch in 2018.