Trading and price setting in financial markets face disruption within a decade as artificial intelligence (AI) turns investors away and computers start to trade against each other.
The stark warning was made on Monday by Sam Sicilia, the highly respected chief investment officer of Hostplus, an industry superannuation fund catering to employees in the hospitality industry.
Mr Sicilia predicted that in less than 10 years, smart phones would be faster than the fastest computers today, flagging the extraordinary power that next generation computers will possess.
As a result of such rapid technological development, investors who tend to use intuition to help guide their decision-making will find that intelligent computers will be able to develop similar, if not superior intuition by studying and recognising patterns.
“In today’s market, those investors who use more intuition and fewer spread sheets will win. In the future, it will be the rise of the machines,” Mr Sicilia said on the sidelines of the Australian Institute of Superannuation Trustees investment conference in Cairns.
In an audience survey, 60 per cent of conference delegates said that humans would always play a role in the investment process, but Mr Sicilia said that would increasingly not be the case.
“AI will make better decisions,” he said, pointing to the victory earlier this year of a computer Go program developed by Google, over 18-time Go world champion Lee Sedol.
Go is a complex board game and the match was compared with the historic chess match between Deep Blue and chess champion Garry Kasparov in 1997.
One of the risks for individual and professional investors is that those investment companies that start to build AI into their processes will start to outperform other investors, making those investors increasingly reluctant to trade.
“Disruption is likely to come from an uprising of disenfranchised investors around the world who are losing to technology. As taxi drivers feel disenfranchised by Uber, fund managers and investors will feel disenfranchised by other fund managers who have access to AI,” Mr Sicilia said.
“They will stop trading. Why play the game when you are always going to lose? This is all uncharted territory,” he said.
Looking further ahead, markets face even greater disruption as intelligent computers trade against each other and, having studied the same patterns, want to buy and sell the same security at the same time, potentially causing trading to stop altogether.
“If you get two algorithms trading against each other, why would only one of them take one side of the trade?”
Mr Sicilia said that eventually capitalism could be at risk as price discovery in financial markets was disrupted altogether.
When it comes to implementing technological changes inside companies, Kyle Kung, managing director at GX Innovation Lab at State Street in Hong Kong, said managers should encourage employees to fail when trying out new ideas and systems – but to fail fast.
He said that when his division was trying new products or services, they would typically bring business analysts, technology and user experience designers together and put together a prototype within six weeks. Using teams in different countries was useful so the company could take advantage of staff working in different time zones.
Mr Kung said that in determining where to employ new technologies, it was useful to start with the organisation’s “pain points”.