AI and machine learning spell radical changes for traders, asset management

ARTIFICIAL intelligence and machine learning are set to shake up traders' jobs by enabling them to generate their own alpha, boosting fund managers' returns in today's asset management industry, currently under pressure to justify fees with outperformance.

That's according to Seth Merrin, founder and chief executive of Liquidnet, a dark pool trading platform with more than 930 asset managers as members, across 46 markets.

Dark pools were originally designed for institutional investors to trade large blocks of shares without having to disclose their identities, volumes or prices, unlike traditional exchanges.

Members of Liquidnet manage assets totaling US$15 trillion.

In a recent interview, he said fund manager performance is the biggest problem in asset management today.

Seth Merrin, founder and chief executive of Liquidnet, says active managers have undershot their benchmarks over the last 10 or 15 years.

"You don't have to go very far to read that the active managers have underperformed their benchmarks pretty consistently over the last 10, 15 years.

Asset management in Asia in 'hyper-growth' mode

"We've seen massive amounts of money leave active management and go into passive management and exchange-traded funds (ETFs). Quite frankly, it's accelerated and if our members don't perform better, it's going to continue to accelerate."

What could help change the game is tapping the power of artificial intelligence and machine learning to analyse and generate insights from data.

"There are some hedge funds that are performing incredibly well because they were very early on in understanding the power of this technology. Most active managers have not."

Now, the change will take place in the asset management industry, starting with the trading side.

"Traders today are looked at as a cost centre. It's an amazing amount of technology, expense, time and effort that goes into simply implementing their portfolio managers' orders.

"We've created all this technology that actually helps the trader implement and find liquidity so much better than just a human being can," said Mr Merrin.

Liquidnet is introducing a new analysis tool called Discovery, that uses artificial intelligence and machine learning technology to analyse market information and alert traders and fund managers if there are market events that may impact the portfolio.

It helps traders take advantage of short-term stock movements in the market to generate their own performance, or trader alpha, alongside fund managers.

On the amount of upside fund managers would be able to generate above what they were previously, the company said it was too early to say definitively.

Lee Porter, Asia-Pacic head of Liquidnet, said the tool has currently been introduced to 100 members in the US and Europe, with 20 across Hong Kong, Singapore and Sydney on pilot.

In Singapore, Liquidnet was recently approved for a capital markets licence by the Monetary Authority of Singapore, which would allow its approximately 30 members here access to their full range of offerings, including Discovery when the tool is officially rolled out, aside from block trading.

Mr Merrin strongly believes the asset management industry needs to embrace technology to continue surviving.

"This whole industry has been very manual and very analog", he said. "They need this technology, they need this evolution, they need this value-add to help their RMs succeed and do better."

"I think most industries have continued to do things the way they've always done until there is a company or companies that can think differently and change the industry.

"This industry needs a little disruption."