In the upcoming months and years, as traders and platforms incorporate artificial intelligence (AI) into everyday trading, financial markets—from conventional exchange-traded funds (ETFs) to cryptocurrencies—run the risk of being completely disrupted.
AI agents are making trades rapidly and automatically, bringing about a massive change in trading from large language models (LLMs) searching through vast amounts of data for long-term trends and short-term signals. Is it ever possible for a person to surpass a bot?
What are the advantages and disadvantages of AI trading agents in a market where everyone is looking for an advantage, and will laws be required to try to maintain fair competition?
How AI Trades Using Machine Learning
Artificial intelligence has made significant advancements by combining various machine learning models and techniques, leading to the rise of generative AI and AI robotics. The finance industry is adopting a similar approach, as discussed by Christina Qi, former hedge fund CEO and current CEO of Databento.
AI agents, using techniques like reinforcement learning, deep neural networks, and natural language processing, are combining historical data analysis with real-time market signals, news sentiment, and macroeconomic trends to optimize trade execution, making dynamic, autonomous decisions set in motion by a simple prompt.
Victor Tan, co-founder of GameGPT and Rainmaker Games and CEO of TrinityPad, explains that AI trading platforms use advanced language models for sentiment analysis, analyzing vast amounts of social and news data to gauge market sentiment and identify trends before they manifest in price movements.
Global markets can change drastically due to market volatility or Black Swan events, increasing the risk of “model drift.” When AI models run on outdated data, their performance declines, potentially leading to significant financial losses in trading and investment. Developers must adapt to these unexpected changes.
Tan explains that models are continuously trained to adapt to new data, such as economic shifts or Black Swan events, through extensive backtesting and real-time adjustments powered by dynamic risk management algorithms.
Today’s AI Trading Bots Are “Yet Early”
It’s crucial to keep in mind that research and development is currently ongoing for AI trading agents. Investors should be cautious just because a lot of websites claim that their AI can optimize returns.
Johnny Gabriele, Head Analyst of Blockchain Economics and AI Integration at The Lifted Initiative, acknowledges the potential of AI in trading but warns that its robustness and reliability are currently the Achilles’ heel.
Gabriele emphasized that most AI agents utilize LLMs, which have both strengths and weaknesses. Having five models for specific tasks has proven effective in creating agents that surpass the Chatbot model. However, the limiting factor of LLMs makes fine-tuned and complicated tasks challenging.
Will Trading Be Prohibited for AI Agents in the Future?
AI trading technologies may eventually become too good to be permitted to operate in the market if they continue on their current path of professional development.
TrinityPad’s Tan stated that the regulatory landscape for AI trading agents is evolving, with some jurisdictions introducing frameworks and others defining clear guidelines. As AI trading agents become more efficient, there may be calls for limitations to ensure fair market practices and prevent systemic risks, but they believe regulation and innovation can coexist.
Tan suggests that AI agents can democratize financial access while maintaining market integrity, promoting transparency, ethical AI use, and user education for efficient and equitable AI-driven investing.
The Bottom Line
AI trading agents may improve traders’ and investors’ understanding of global markets, potentially democratizing access to advanced technology and financial tools. AI can help us navigate the complexities of the financial industry, but caution and vigilance are crucial in finance, trading, and investment. AI can also help us shortcut through vast amounts of information.
