Artificial intelligence is already actively transforming the investment landscape throughout Wall Street and beyond, but what does this emerging technology mean for the future of risk management for broker-dealers?
The rise of AI and generative solutions will be a game-changer for institutional investors and will revolutionize the decision-making process surrounding assets.
While human judgment when it comes to risk assessment is impacted by inefficiencies and challenges in interpreting data, AI can eliminate these challenges by delivering a more consistent flow of accurate information and actionable insights for institutional investors and individuals alike.
We’re already seeing key institutions ramp up their exposure to AI solutions, and Deutsche Bank announced a multi-year partnership with NVIDIA in 2022 with a core focus on implementing AI and machine learning (ML) tools to help traders manage risk more effectively while running scenarios faster at scale.
With generative AI set to become a $1.3 trillion market by 2032, the application of this transformative technology will only grow in the coming years, helping to bring unprecedented levels of risk management to broker-dealers in the process.
But how will the AI revolution change risk management for institutions? Let’s take a deeper look at the technology revolution that will transform decision-making throughout the world of investing:
Transforming Decision-Making
There are many different facets and factions of AI, but perhaps no subset of the technology is more important in the world of risk management than machine learning. With their ability to rapidly analyze significant volumes of structured and unstructured data, ML algorithms can provide actionable insights for broker-dealers to shape their strategies.
As we’ve already touched on, AI is already being adopted among key institutions at a rapid rate. Another example of an early adopter is Citibank, which utilizes the technology to undertake risk management through a superior set of data analytics and insight capabilities.
Because artificial intelligence can seamlessly interpret rich datasets in a manner that humans couldn’t compete with, the ability of broker-dealers to access more nuanced financial analysis can transform their perception of risk, and allow for more affirmative trading decisions.
The technology’s ability to rapidly deliver actionable insights into trading strategies isn’t limited by borders, and it’s entirely possible for broker-dealers to tap into the potential of international markets through this wider interpretation of data.
With this in mind, broker-dealers operating with prime services that offer a more globalized, low-latency outlook could unlock far greater efficiency with the help of AI.
Additionally, ML algorithms can mitigate risk in the form of regulatory compliance, and artificial intelligence can provide alerts alongside actionable advice when a regulatory change is detected, which could impact compliance on a domestic or international level.
Next-Generation Forecasting
Risk management can also be undertaken through far more comprehensive levels of forecasting. While many broker-dealers rely on traditional regression models or their insights, these can fail to take into account more non-linear relationships between the wider macroeconomic circumstances surrounding prospects or varying degrees of fundamental analysis.
While humans would struggle to form comprehensive predictions based on masses of data, generative AI solutions can offer forecasting accuracy by capturing nonlinear effects with far greater accuracy.
As just a taste of the depth generative AI can delve into delivering accurate forecasts, the technology can utilize satellite imagery to analyze parking lot activity and crop performance to gain a more holistic overview of the macroeconomic factors that could influence investment strategies.
Because this powerful fundamental analysis occurs in real-time, it’s possible for broker-dealers to comprehensively understand the level of risk attached to trading opportunities ahead of wider markets, equipping them with the ability to make decisive movements before price volatility could exacerbate profits or losses.
Building Beyond Bias
At this stage, it’s important to highlight that the potential of generative AI and machine learning algorithms is linked directly to the quality of the models that it can train on.
Generative AI applications must be continually checked internally and externally for prospective bias emerging from underlying data that could manifest in inaccurate insights.
This means that ML adoption isn’t the be-all and end-all for broker-dealers seeking to manage risk throughout their trading activity and that algorithms must be continually monitored to ensure they’re operating as well as possible.
With the wider geopolitical landscape delivering far more volatility in recent years, it’s more important than ever for broker-dealers to work alongside algorithms that can manage risk without inefficiencies lurking within their ML frameworks.
When utilized to its full potential, generative AI can operate in a manner that eliminates human bias and delivers functional risk management as a result of its training on extensive, well-prepared datasets.
As the technology grows, solutions will become more prevalent throughout the market, and the broker-dealers with the best-trained ML algorithms will be best placed to reap the benefits. With this in mind, the selection process for unbiased AI insights is likely to become one of the most important factors among institutions on Wall Street.
Embracing the Future of Risk Management
Broker-dealers embracing AI and ML insights can benefit from its transformative potential before wider markets react to these enhancements in risk management.
At its core, AI can assist institutions in navigating even the most volatile of markets efficiently through actionable insights that can consider a vast range of data points to achieve unprecedented accuracy.
Poor risk management can undermine the operations of even the most resourceful broker-dealers. The rapid growth of AI means that the perception of risk within the investment landscape may never be the same again.
