We’re investors, so when we think about the most exciting application for artificial intelligence (AI) we can’t help but think of using AI to tell us how to make money in the stock market. The idea of automated trading has been around for a long time now. Also known as algorithmic trading, the use of automation to trade takes the human bias out of the equation which is what oftentimes leads to losses. Human emotions like fear and greed ensure that the majority of us will never have a successful career in trading because we cannot keep our senses about us when dealing with a stock market that is so irrational.
If we could just take the power of machine learning and let it loose on the stock market then we would be certain to generate alpha. If we’re going to have a go at this business model, we’ll need funds for two reasons. The first use of funds will go towards buying the computers and human talent we need to build and develop our algorithmic trading system and the second use will be the actual money we will use to invest in order to generate profits.
The first thing you need to know here is that some of the most prominent hedge funds in the world are already using machine learning for algorithmic trading and have been doing so for quite a while now. The Medallion Fund at Renaissance, run mostly for employees of the company, has one of the best records in investing history having returned +35% annualized for over 20 years. Why are we not surprised that using artificial intelligence for algorithmic trading can produce the best returns ever recorded?
So we might be tempted to think that since the best hedge funds in the world seem to be dominating the use of AI for trading, that there are no opportunities left. The truth is that there limitless possibilities in this space because every trading strategy is unique according to the capital behind it. If you have $65 billion dollars that you have to manage, your strategies will have to support very high volume trades. If you have just a million dollars you’re playing with, you have much more flexibility because you can buy low volume stocks and your trades are in no danger of moving the market. There’s room for all in this space which is why we’re going to present to you 6 companies which want to use artificial intelligence to do algorithmic trading.
We’ve written about Sentient Technologies before and noted that one of the 3 applications they are pursuing with their AI platform is that of algorithmic trading. The Company has built trillions of AI traders and then distilled them into a single AI trader that they are considering to spin out as a separate company. Sentient has received the most funding ($135 million) of any AI startup that we know of.
Founded as a blank check company in 2010, Clone Algo has a rather convoluted past and is currently raising $250 million in pre-IPO Round C funding after which they hope to begin trading on NASDAQ. They claim to have a 8-10 year lead over their competitors having spent over $152 million in the past 5 years developing their algorithms. As the company is based in Singapore, we translated their value proposition from Engrish to English and it seems to be as follows:
- Deposit a minimum of $10,000 with one of their brokers
- Pick one of their AI algorithms to run against your capital pool
- Generate passive income 24/6
They claim to have various investment firms and hedge funds using their platform but the whole “work from home and make $1,000 a week doing nothing” value proposition makes us wary.
Founded in 2013, Alpaca has taken in seed funding of $1 million to develop their trading platform called Capitalico which allows you to construct trading algorithms based on technical analysis. If you’re not familiar with technical analysis, it’s simply the practice of using chart patterns to predict stock price movements. These charts are often made up using “candlesticks” which are structured as follows:
While technical analysis is a fascinating topic, you don’t need to understand it to know what Alpaca does. Their platform simply allows you to identify certain patterns that you deem bearish or bullish and then build a trading strategy based on the appearance of those patterns. The “AI” component helps recognize the patterns as they form. While www.stockcharts.com already does this to a certain extent with well known patterns, we assume that Alpaca has the advantage because they can identify any user-defined pattern in real-time.
Founded in 2015, French startup Walnut Algorithms has taken in $446 thousand to “use advanced machine learning techniques with financial expertise to generate absolute return investment strategies“. Their advisory board is filled with experienced professionals in the area of asset management, trading, and quantitative finance. Walnut Algorithms plans to start managing third party assets from 2017.
Binatix is a deep learning trading firm that came out of stealth mode in 2014 and claims to be nicely profitable having used their strategy for well over three years. Little is known about the company other than what was published in this recode article back in 2014. Binatix is also said to be working with hedge funds that are developing and implementing investment strategies based on their technology.
Founded in 2011, Aidyia is a Hong Kong based hedge fund that uses “artificial general intelligence” (AIG) which is a branch of AI that more closely mimic’s the human brain. In 2015 Aidyia launched a long/short fund that trades in U.S. equities and makes all stock trades using artificial intelligence with no human intervention required. The company is funded by a small group of investors along with the Hong Kong government.
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