AI could be Capital Market’s Robin rather than their Batman

When the Economist declared that data, rather than oil, had become the world’s most valuable resource in 2017, it heralded a new catchphrase that has been repeated ever since. When you investigate a little more, you realise that it was British mathematician Clive Humby who declared it in 2006. He was also referring to the fact that data, like oil, isn’t useful in its raw state. It needs to be turned into something useful, with its value lying in its potential.

Today Artificial Intelligence (AI) is being hailed as the newest gold rush across almost every industry with Capital Markets being no different. With there being so many operational gaps within capital markets, it fosters the belief in the uninformed that AI is here to resolve them all. Is it that simple though? Or is it another case of the underlying message being lost in the hype and hysteria of it all?

The adoption of AI, including large language models (LLMs) made popular by applications like ChatGPT, presents both opportunities and challenges for firms. Vendors are touting these advanced technologies with promises of streamlining operations, enhancing efficiency, and providing deeper insights into market dynamics.

Market conditions and the levels of volatility seen over the past decade have left certain firms in a difficult position due to changes in their business models. Revenues have increased but so have their costs and the problem is that whilst revenue outlook has lost some of its lustre, costs remain consistent. The industry has relied on low rates and cheap money and things are changing.

Recent research by Oliver Wyman stated that capital supporting the industry is up 60% vs before 2008, with returns down around 18% to 12%. Add in new capital requirements in the US and the EU, which could hit return on equity by estimates of another 1 – 3 percentage points. The gap is set to widen, and firms haven’t been able to achieve revenue growth that exceeds cost growth. Reliable solutions are needed to bring down these costs and to put it simply, firms need to do more with less.

Which brings us back around to AI and the endless outcomes attributed to it. How do you separate fact from fiction and the half-truths from whole lies? There is a litany of potential AI solutions being showcased currently within the market. Innovation crawls slowly within Capital Markets though and being agile is not often the word associated. AI needs to tackle specific pre-existing issues whilst reducing overall costs.

When we look at these challenges and apply AI judiciously, it can serve as a powerful tool for enhancing a firm’s operation team. A tier 1 bank was recently fined almost a $350 million penalty relating to gaps in trading venue coverage and inadequate data controls. The Federal Reserve Board and Office of the Comptroller of the Currency (OCC), who issued the fine, felt that the bank failed to surveil billions of instances of trading activity across at least 30 trading venues globally.

This isn’t an isolated incident either as a broker in Australia was fined the largest-ever penalty imposed by the Australian Securities and Investments Commission just weeks later. There are gaps throughout Capital Markets that AI could solve and not just in trade surveillance. ICE Futures Europe recently took Summary Enforcement disciplinary measures against another Tier 1 Bank for incorrectly maintaining a client’s position account as gross, resulting in an overstatement of the open interest published by the Exchange.

These are examples of issues that vendors should be touting current solutions for. Acuiti recently published that around 40% of operations activity today still involves manual intervention. Automation, and eliminating intensive manual work, is a huge opportunity that AI can help solve. AI has the potential to solve challenges that were previously extremely labour-intensive, and more importantly, at a cost far lower than any current legacy solution.

HelloZero has been able to automate the ingestion process for one of our customers and cut down on their manual work by up to 40%. The team currently has an AI solution in development that will be able to identify unknown reference data imported during the ingestion process with a 95% probability rate. This is where AI can thrive, focusing on addressing existing gaps and removing manual processes such as mapping of reference data. This leads to clean, auditable processes and allows you to relocate manpower elsewhere.

To conclude, AI is very much a hot topic and is being touted as having the potential to bring about world peace all the way to assisting VAR in the premier league. As you can envision, a mixed bag of promises and more importantly, results. Capital Markets will certainly see a slew of new solutions enter the market to tackle existing problems. Rome wasn’t built in a day though and this sentiment will apply to many of these solutions. The success of AI within Capital Markets will be determined, we believe, by leveraging its potential successfully in conjunction with specific industry knowledge and used to resolve existing industry problems.

Ready to identify areas in your operations where AI can make a significant impact? Contact HelloZero today and discover how our AI-powered solutions can help your firm achieve its goals.