AI and Trading: How Long Until It Earns Our Full Trust?

AI and Trading Already Have a History, One That Started Long Before OpenAI Became a Famous Company

At the beginning of 2023, some sources valued the company at $29 billion, while its revenue is expected to increase by 400% from 2023 to 2024. Thanks to the popularity of their AI language model, OpenAI’s fast-forward track towards a more technologically advanced future has become a popular topic in various circles, and financial trading is no exception.

AI and trading already have a history, one that started long before OpenAI became a famous company. In fact, AI is widely used in financial trading and has transformed the industry in many ways. Technologies such as machine learning, natural language processing, and deep learning are being used to analyze large amounts of financial data and to make predictions and decisions in real-time trading environments.

Traders who haven’t used any kind of AI application themselves at least know or have heard of others who have. Algorithmic trading involves using computer algorithms and Expert Advisors (EAs) to execute trades automatically based on predetermined rules and market conditions. While EAs are not necessarily considered AI, they do use some AI techniques such as machine learning or neural networks in their programming.

In a nutshell, AI is used to analyze market trends, identify patterns, and make predictions based on historical data, which can help traders make more informed decisions. But even in today’s advanced world of algorithmic trading and language models, AI is not a substitute for human expertise. Traders still need to interpret and analyze the results produced by AI systems to make informed decisions.

Will we ever get to a point where AI earns a trader’s full trust in analyzing, executing, and trading autonomously? It’s an ominous prospect for some, and even with all the advances made in the field, it seems unlikely that a human would ever relinquish full control to a machine to make every trading decision for him or her without any supervision. Especially when there are potential profits on the line.

With that said, there are four general areas where AI still needs to make some advances before traders can earn at least more if not full trust in AI.

Accuracy

The accuracy of AI systems is critical for gaining trust from traders. It is important to ensure that the AI models are performing as expected and are not subject to biases or errors that could lead to incorrect predictions or decision-making. As an example, ChatGPT has come under heavy fire for being biased in some of its responses when the prompts were of a political or religious nature.

Testing and validation are required to ensure that the AI models are reliable and accurate, and that they can perform well in different market conditions and scenarios.

Transparency

Transparency is another important key that will enable traders to understand how the AI arrived at a particular decision or prediction. This is particularly important in cases where the rationale behind a decision can have significant implications in terms of profits or loss.

Traders need to be able to trust that the AI system is making informed and rational decisions based on available data, and not making decisions based on hidden or undisclosed factors. One way that AI systems and technique will be able to achieve this is by providing clear explanations and visualizations of the AI’s decision-making process.

Accountability

AI systems need to be accountable for their decisions and actions. This means that traders need to be able to pull the curtain back and identify who is responsible for the actions of an AI system and hold them accountable for any errors or malfunctions.

In financial trading, this is of paramount importance since decisions made by AI can have potentially life-changing financial consequences. And it’s not the AI’s life that would change. As such, clear lines of responsibility and accountability need to be established to ensure that any errors or malfunctions can be traced back to their source.

Regulation

The use of AI in financial trading needs to be subject to appropriate regulation and oversight to ensure that it does not pose a risk to financial stability or trader protection. The EU Council is expected to implement an AI Act by the end of 2023, but a lot of definitions need to be ironed out and agreed upon first.

Beyond that, regulators need to ensure that the AI systems are compliant with relevant laws and regulations, such as those related to data privacy and security. Appropriate oversight is also required to monitor the use of AI systems and to identify any potential risks or issues that may arise. This can help to ensure that the use of AI in financial trading is safe and responsible, and that it also benefits traders.

So, What Does the Future Look Like?

The future of AI in financial trading looks promising, with the potential to greatly improve the efficiency and accuracy of trading decisions. However, to fully realize this potential, several challenges need to be addressed.

The argument that traders will one day in the future have total trust in AI to make fully autonomous decisions on their behalf is a weak one. Even still, AI will undoubtedly continue to play an increasingly important role in financial trading in the coming years, with traders benefiting from its ability to analyze and interpret large volumes of data in real-time. As with any new technology, we should approach the use of AI in financial trading with a healthy dose of caution and always weigh any benefits against the potential risks.