Regular stock trading loses ground to computer algos, JPMorgan expert says

Maria Nikolova

Most of equity investors today use quantitative investing based on computer formulas and trading by machines instead of the traditional fundamental approach, according to JPMorgan’s Marko Kolanovic.

The trend of algorithms replacing humans in various financial areas is gathering pace, with the stock market feeling the impact of the recent developments in artificial intelligence and robotics too.

Marko Kolanovic, global head of quantitative and derivatives research at JPMorgan, was quoted on Tuesday by CNBC saying that whereas fundamental narratives explaining the price action abound, most of equity investors today do not buy or sell stocks based on stock specific fundamentals. In fact, he estimated that “fundamental discretionary traders” account for humble 10% of trading volume in stocks. Passive and quantitative investing generates about 60%, more than double the portion a decade ago, according to Mr Kolanovic.

The comments made by Mr Kolanovic are in tune with those by Marty Chavez, Goldman Sachs’s deputy chief financial officer and former chief information officer. He has explained that automated trading programs have assumed the bigger part of the work performed by human traders at the company’s US cash equities trading desk in New York. At present, he said, there are only 2 equity traders working at this desk, compared to 600 traders in 2000.

Mr Chavez has forecast that currency trading and certain parts of investment banking will follow suit.

Goldman Sachs has already commenced the process of automation of currency trading. The results are dismal for traders, as four traders can be replaced by one computer engineer, according to Mr Chavez. In fact, currently, about a third of Goldman Sachs’s staff are computer engineers.

Talking of stock trading, let’s recall that earlier this year, Japanese online brokerage Securities, a subsidiary of Mitsubishi UFJ Financial Group Inc (TYO:8306), launched a special AI-powered solution for its clients. The tool, named “AlpacaSearch for”, developed jointly with AlpacaDB Inc, targets stock traders using Kabu Station Premium.

The AI system scans the share prices of Japan-listed companies in order to identify shares exhibiting similar trends. The AI technology is able to detect correlations that human traders cannot usually notice and thus signal trading opportunities. It also detects overvalued and undervalued stocks by identifying correlating stock charts. These findings are used for a trading strategy where investors go long on the underperforming shares and go short on the overperforming shares in a correlated pair.

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