Liquidnet is currently piloting a new AI platform called Discovery that they say will allow buy-side traders to develop their own alpha.
The platform Discovery is a collaboration between Liquidnet and OTAS, a technology platform that has been building artificial intelligence technologies for seven years.
Liquidnet’s chief executive Seth Merrin said that Liquidnet bought OTAS about a year and a half ago to build out this intelligence.
“We believe that the big differentiator going forward will be access to data and what you do with it. Only AI can really sense the patterns and the interesting nuggets across certain data sets that provide alpha and provide a 3D view into how you can manage a portfolio,” he said.
Mr Merrin said the project was currently being piloted in Australia and it was the first time that AI had been applied to the execution side in asset management firms.
“We are applying it on the trading side because we think that traders can go from simply implementing their portfolio managers orders to being actually part of the investment process, generating performance along with the portfolio manager,” he said.
Liquidnet called it ‘trader alpha’ and Mr Merrin said that it is very different from alpha generated by a portfolio manager.
“Trade alpha benefits from the short-term stock moves in the market on a daily basis. The portfolio manager looks for long term. But both are added to performance,” he said.
Recent data suggests that there are billions in underperforming funds; Mr Merrin said underperformance has become systemic and that’s what the AI could help with.
“What we are doing is providing the opportunity to take advantage of data and, over time, it’s going to get more and more robust and refined,” he said.
Mr Merrin said that the artificial intelligence would allow traders to ask questions they had never been able to ask before.
“We believe that machine learning plus human intelligence together creates a much better outcome. It still makes a market because people are going to be looking at this data with different perspectives and making different decisions,” he said.