Written by Virginia Favaro
It should also come to no surprise that we are seeing an increasing amount of money invested in the development and implementation of AI. Major investment banks want to utilize and exploit this technology to cut costs, increase efficiency, and ultimately improve their bottom lines.
By 2025, over 230,000 jobs in the capital markets industry will disappear due to the incorporation of Artificial Intelligence (AI) into the financial services industry. These results from research firm Opimas are just one of many that point to a common trend: AI is killing jobs on Wall Street.
‘Artificial Intelligence’ has become one of those buzz-words that everyone likes to throw around, but what is it exactly?
AI refers to the science of teaching computers to think like humans. These artificial intelligence systems learn from experience and evolve as they process more and more responses and reactions. As they create ‘memories’ and experience ‘life’, they change, just like a human would.
Within the realm of AI, there is also a subset called ‘Machine Learning’ (ML). AI systems can rebuild themselves and seek new information on their own; they are self-learning. On the other hand, ML is more similar to coding: you select a set of data and, using statistics and algorithms, then build a model that will analyze this data according to the constraints you select. If you choose the wrong constraints, your results will be incorrect, indicating that the process is far more dependent on human inputs than an AI system.
It should also come to no surprise that we are seeing an increasing amount of money invested in the development and implementation of AI. Major investment banks want to utilize and exploit this technology to cut costs, increase efficiency, and ultimately improve their bottom lines. Mizuho is one bank that has often been in the headlines. From developing its own AI platform, to implementing AI trading and working with SoftBank to create an AI-powered consumer loan service, Mizuho has been at the forefront of this technological innovation.
Other investment banks have also implemented similar AI programs. JP Morgan has been testing ‘LOXM,’ its proprietary AI program, in Europe since the beginning of 2017 and is looking to expand it to its American and Asian operations in the last quarter of the year.
But AI is not coming for everyone’s job equally. Research from Opimas suggests that while 90,000 jobs in Asset Management will be lost to AI, only 4,000 jobs in investment banking will. Sales and trading (S&T) is another area that is going to be suffering from the advent of AI, with over 45,000 jobs predicted to disappear by 2025.
Asset management is particularly vulnerable because of underlying trends within the industry. Exchange-traded and passive funds have gained popularity, and robo-trading is becoming more widespread. According to Pierron, the co-founder of Opimas, “AI will complement that.” When you add the fact that most active funds, where a human makes the trading decisions, have underperformed in terms of ROI when compared to the S&P 500, you can see why AI has such a strong potential to displace jobs in this industry.
A similar notion applies to sales and trading. S&T is already making a shift toward algo-trading, but there are also many applications of AI and ML. JP Morgan’s ‘LOXM’ program outperformed both manual and automated existing trading methods in trials on equities trade, according to JPM. ”Because trading equities in the capital markets is mostly electronic, there’s a massive amount of quality data available on which ML models can be applied” says Xavier Menguey, Global Head of Equities at Goldman Sachs. Global markets divisions provide much scope for these technologies, increasing the risk of job displacement.
While AI tends to get a bad reputation for automating jobs on Wall Street, not everyone thinks it is such a major threat to jobs. Jo Hannaford, Head of Goldman’s EMEA Technology division sees AI and ML as technology that is meant to complement the work done by traders. She suggests that traders are ”using machine learning to analyze different data sets to come up with the recommendations to make richer and more informed decisions” and at the end of the day “humans are still making the final decisions.”
A lot of the applications for AI also lie in replacing workers carrying out lower-skill routine functions. NYU Stern professor Vasant Dhar points out that AI “will change the nature of jobs; it upskills people and it requires them to do more because machines are now doing more for you.” Employees would have the opportunity to carry out work that is more interesting, highly-skilled, and complex, rather than having to spend time completing grunt work.
While this spins AI onto a positive note, the advent of this technology is still worrisome for those working in middle-office and back-office jobs. Those are the roles where people carry out much of the more manual work making them the ones most likely to get replaced.
So where does that leave us? While we are still uncertain about the extent to which human jobs will be replaced, we are certain that disruption will come. Richard Gallavin, a MD at Mizuho’s TMT investment banking team in San Francisco, has referred to the use of AI in financial services as “revolutionary.”
As business students, especially those who will work in finance, we will need the ability to adapt to this change. AI is going to disrupt the workplace and the way the industry operates. It will be up to us to keep up with this change and be able to work alongside this technology instead of getting left behind.
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