Will AI rule Wall Street?

Artificial Intelligence (AI) holds great promise for banks as it makes everyday tasks more efficient. Complex analysis and risk modeling are also made easier and faster with this tool.

According to Business Insider , AI has actually revolutionized Wall Street for many years now, as most transactions have been and are being carried out by algorithms. By processing the information received, analyzing and making decisions to buy or sell, algorithms are helping to carry out 60-75% of daily transactions on Wall Street, the financial center in New York City (USA). However, the question now is whether this rate can be higher and whether AI will completely take over human work in finding profits?

AI application race

Wall Street is expecting AI to have a major impact on financial trading. According to a survey by JPMorgan, one of the oldest financial services firms in the world, headquartered in New York, 53% of traders believe AI or machine learning will be the most influential technology on trading in the next 3 years (compared to 25% in 2022).

According to new data from Evident Consulting (USA), at the most developed banks, about 40% of recruiting positions are related to AI such as data and quantitative engineers, administrators...

Eigen Technologies, a New York-based global technology company that provides AI services to banks such as Goldman Sachs and ING, said AI requests from banks increased fivefold in the first quarter of 2023 compared to the same period last year.

Alexandra Mousavizadeh, CEO and co-founder of Evident, said that the release of ChatGPT by Open AI in November 2022 has made bank leaders more aware that AI is a game-changer in the banking sector because of its many prospects. "The cost of AI talent has increased significantly. An AI race has begun," Mousavizadeh emphasized.

More and more Wall Street banks are adopting AI technology

A prime example of AI being used in the banking and finance sector is Deutsche Bank, Germany’s largest private banking group, which has developed a product that can analyze whether its clients’ investments are at risk. The bank also uses this tool to find funds, stocks, and bonds that match each client’s needs and desires.

Kirsten Anne Bremke, Deutsche Bank's Global Head of Data Solutions, is enthusiastic about the combination of artificial intelligence and human intelligence.

ING, a Dutch multinational banking and financial services group, is using AI to screen potential defaulters. Meanwhile, Morgan Stanley is in the race to use AI, testing new AI technologies using a Large Language Model (LLM). Morgan Stanley currently owns a patent for a model that uses AI and machine learning to identify information from the US Federal Reserve (Fed) that reflects strict or dovish policies, thereby helping them predict monetary policy measures.

JPMorgan has similar plans. In a patent filing in May, the bank said it had created a ChatGPT-like product that could help investors pick the right stocks. JPMorgan advertised 3,651 AI-related jobs globally between February and April, nearly double the number of rivals Citigroup and Deutsche Bank, according to Evident data.

Traders at the New York Stock Exchange

Banks are using AI to better tailor hedging solutions, through tools like interest rate swaps and equity derivatives, allowing them to offer better pricing to clients, says Steven Burrows, a director at multinational law firm Fieldfisher. “Every business, every trading desk and every investment team is trying to understand AI,” says Yuriy Nevmyvaka, head of machine learning at Morgan Stanley.

US bank Wells Fargo is using large language models to help determine what information customers need to report to regulators and to help them improve their business processes. Meanwhile, French bank BNP Paribas is using chatbots to respond to customers and using AI to detect and prevent fraud and money laundering. Similarly, Cast, the AI ​​monitoring and analytics tool of French bank Societe Generale, uses its computing power to scan for potential misconduct in the capital markets.

Governments race to regulate AI tools

Transparency and efficiency

The promotion of AI application in the financial and banking sectors, although bringing positive changes, also poses significant challenges for the financial market: from the risk of job loss to the transparency and efficiency of this technology.

First, the risk of future job losses is high. Goldman Sachs analysts worry that 300 million full-time jobs globally could be automated by AI. That figure could include 35% of the business and financial sector in the US.

Billionaire Warren Buffett, Chairman of Berkshire Hathaway Inc., expressed concern at the company's annual general meeting on May 6: "When something can do all kinds of jobs, I feel a little worried. Because I know we can't reverse this development." Sharing the same view, CEO Brian Moynihan of Bank of America assessed that AI can bring great benefits and help reduce many tasks, but it is important to understand how the workflow and decision making are done.

Although AI application has positive impacts, it also comes with challenges.

Second, transparency is a matter of particular concern when expanding the use of AI in the banking and finance sector. Banks are obliged to conduct transactions and make trading decisions based on authentic sources of information. According to expert Anne Beaumont, partner at the law firm Friedman Kaplan Seiler Adelman & Robbins LLP (USA), once the use of AI is expanded, it will be difficult to explain to customers and managers what data the bank has based its decisions on and whether the use of that data is valid or not.

Furthermore, according to Alan Blackwell, professor of computer science and technology at the University of Cambridge (UK), banks need to use big data from many different sources to "train" AI tools and many problems will also arise from that.

Third, the cost of developing and operating AI tools is very expensive. Eigen Technologies founder and CEO Lewis Z. Liu said the estimated cost of using a large language model to answer customer questions is about $14 per question, while the cost of having a lawyer answer is only $6 per question.

Although the role of AI in Wall Street transactions is not new, many analysts are talking about a future where AI can completely replace humans in performing financial transactions and bring profits, especially in the context of AI exploding and being widely applied. Today, banks are in a "full of excitement" race to develop and apply AI to increase business efficiency, thereby promoting rapid changes in the banking and finance industry in the near future. However, consulting organizations all believe that banks need to clearly identify which areas AI will create outstanding value in order to have a clear AI application strategy. In addition, it is necessary to focus on training employees, recruiting more experts, and having a new risk management framework to deal with issues related to AI, the unclear policy environment in AI application, as well as issues related to the accuracy of data.

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