AI in the financial sector: humans are becoming a premium service

It’s now generally agreed that AI will eclipse humans in many processes in the relatively near future. So how can humans stay ahead? What can we do that a machine can’t? Empathise? Love? Make a joke?

Emotional humans of the world, come on, bring it in and show us some love!

Oh, and take a look at this month’s Quick Read, from someone who studied financial English with us a few years ago. Now look where he is…

Stephane Raulois CFA
Chief of Staff Institutional Sales – Global Markets
BNP Paribas

According to Brynjolfsson and McAfee, the world has entered the “second machine age” where automation allows the substitution of many cognitive tasks previously performed by humans (M7 U2 Notes, LSE & Getsmarter, 2021). This major disruptive force is already at play in the financial sector and in particular in trading activities.

The rise of electronic and automated trading is a major phenomenon impacting all asset classes. In 2018, according to a report from the Securities Industry and Financial Markets Association (SIFMA), citing a Greenwich survey, 79% of total currency volumes were executed electronically up from 43% in 2007 (SIFMA, 2019). For cash equities, the Bank of International Settlements indicated that in 2015, 80% of the transactions are now done electronically (BIS, 2016).

This automation process results in: (i) a drop in trading revenues for banks: the trading revenues in the Top 12 banks have consistently declined from 2010 to 2019 from USD 149bn to USD 83 bn (-44%) and (ii) a significant decline in terms of employment:

the number of traders, sales professionals and researchers in the Top 12 US banks has decreased from around 49,000 employees in 2010 to around 32,000 in 2019 which represents a drop of 35% (CNBC, 2020).

Not only has the number of employees in the sector reduced, but the profile of people recruited has evolved as well. Investment Banks recruit more and more data scientists, IT programmers with strong quantitative backgrounds in order to develop trading algorithms. This illustrates the point made by Manyika J.: in the mid-term, AI will most likely be used to complement rather than substitute human work (M7 U3 Notes, LSE & Getsmarter, 2021). However, with the progress of technology we can imagine that IT programmers will be replaced by autonomous learning machines that will be able to create trading codes and improve them by themselves.

This being said, the development of electronic trading has several benefits, amongst others: it allows cost saving and operational efficiencies for companies, it helps to improve transparency and foster compliance with stronger audit trail, it also eases market access for investors, (SIFMA, 2019).

However, more automation with the development of electronic trading is the source of several risks. In 2011, the International Organization of Securities Commissions (IOSCO) noted that electronic trading and in particular High Frequency Trading (HFT) could amplify systemic risk. Due to the deep interconnection between markets, algorithms operating across them can rapidly transmit shocks (IOSCO, 2011).

This trend towards more and more automation requires financial companies to allocate a significant amount of investment to technology development and IT infrastructure. As a result, the main 2 strategies, both identified by Joshua Gans, implemented by financial institutions, have been (Gans, 2016: 84-86):

Beat the competition: an example of this strategy is JP Morgan that invests USD 11bn per year on technology in order to keep ahead of the competition.

Join the competition: an example of this strategy is the acquisition, in 2019, made by BNP Paribas of the electronic equities and prime brokerage businesses of Deutsche Bank.

Module 7 Unit 2 Notes, LSE & GetSmarter, 2021 p.3

Sifma, October 2019, Electronic Trading Market Structure Primer,

BIS Electronic trading in fixed income markets January 2016 –

CNBC, 2020, Why Wall Street Traders Are On The Decline –

Module 7 Unit 3 Notes, LSE & GetSmarter, 2021 p.8

IOSCO Technical Committee, 2011, Regulatory Issues Raised by the Impact of Technological Changes on Market Integrity and Efficiency Consultation report –

Gans. J. 2016. Keep calm and manage disruption. MIT Sloan Management Review.