Thanks to the advancement of trading technologies, in the last ten years, securities trading, especially in the developed world, has experienced massive disruptions. From the rise of sophisticated derivatives to the emergence of super-intelligent robo-traders, the industry is experiencing disruptions like never before. Now, with the blockchain technology joining the game, things are about to heat up even more.
But before we discuss how the combination of blockchain and AI seek to change the securities market, let us look at the advancement of robo-driven trading and how it is shaping the industry. Robo-trading involves the application of powerful algorithms powered by big data to make investment decisions and execute trades.
Unlike human traders, the robo-traders can process vast amounts of data and make decisions a zillion times faster with no human emotion or bias thereby improving decision making. Algo-driven techniques such as High-Frequency Trading (HFT) came about after the 2008 global financial crisis and have since then impacted the global securities market in a big way.
According to Credit Suisse, as quoted in Business Insider, the trading volume of U.S. shares has more than doubled since the rise of HFT and high-speed trading strategies. The advancement of AI in the subsets of Natural Language Processing and Machine Learning has also made significant progress, making it possible for the algorithms to read relevant trading news as it emerges and act on it instantly.
However, this technique is not without flaws as was evident in 2013 when hackers accessed the AP Twitter account and posted a tweet that two explosions had hit the White House injuring the then President Obama. The algorithms interpreted the post as true news, sending shockwaves through the markets with the Dow plunging 143 points.
The Combined Power of AI and Blockchain
Now with the blockchain technology, algorithmic trading is about to pass a significant milestone. The technology has the power to reduce the costs and complexity of trading while ensuring increased trading speed and a secure settlement process.
Solutions such as ThinkCoin are utilizing blockchain and AI to make the trading process smoother and to eliminate intermediaries. Traditionally, securities traders rely on brokers and the big banks as the go-betweens, a process that is not only costly but also lacks transparency and leaves room for human error and fraud.
The distributed ledger technology eliminates the reliance on third parties in a transaction by making it possible for securities buyers to buy directly from the sellers with each party keeping its side of the contract. In the blockchain-powered trading solutions such as ThinkCoin, the smart contract technology is responsible for overseeing the transactions and solving disputes when they arise.
Blockchain is also making algorithm-driven trading more accurate by verifying data integrity before it is run in algorithms to inform decision making. Here also the distributed and immutable nature of the technology makes it almost impossible to manipulate the data stored in it so that there are minimum instances of fraud. When compared with traditional options, blockchain powered trading and investing platforms are the safest.
Another application of the blockchain technology in trading is in regulatory compliance. Blockchain solutions such as Polymath are utilizing the smart contract technology to enable crypto traders adherence to regulatory requirements by setting up the determining criteria in the product and ensuring that only the qualified can buy it. While the project hasn’t identified how it will impact driven trading, there is no doubt that it will be of much benefit.
The Bottom Line
With the blockchain and AI growing exponentially, the future of security trading is bound for major disruptions. Long gone are the days when human emotions would cloud trades, and inaccurate data could wreck havoc in the markets. The big question is what the future holds for human traders and financial advisors in this age of super-intelligent computers.
This is the time for the forward thinking to start exploring the technologies and determine the ways through which they can complement it. While the blockchain and AI-powered algorithms can crunch numbers and make an investment decision, they can’t offer the human touch.
And is it has become evident in the past, the human touch is an essential component in trading and investing. Traders and financial advisors should, therefore, start investing more in investor relations.