The stock market is transforming because of artificial intelligence (AI), which brings new capabilities and alters trading strategies. AI is changing how traders and investors approach the stock market, thanks to its capacity to process massive quantities of data, spot patterns, and draw quick conclusions. AI-powered algorithms are revolutionising stock market trading and investment choices. Huge amounts of financial data, such as past prices, market mood, and social media trends, can be analysed by AI systems to find patterns and forecast future events. This makes it possible for traders and investors to decide with better knowledge and to carry out trades at the most profitable moments, thereby improving profitability.
The global AI in the stock market is anticipated to grow at a compounded annual growth rate of 26.8 per cent to achieve $459.3 billion by 2030, according to a report by Research and Markets published in January 2023, demonstrating the increased usage of AI technology for trading and investment reasons. According to the prediction given by Next Move Strategy Consulting, AI’s market size is projected to upsurge rapidly over the following decade.
By 2030, it is anticipated that its current volume of around $100 billion will increase twenty-fold to approximately $2 trillion. China, the world’s second-largest economy, is forecasted to reach an anticipated market size of AI of $87.6 billion. In comparison, India is expected to register a CAGR of 38 per cent to reach $0.24 billion by the year 2030.
AI is essential in algorithmic trading and high-frequency trading (HFT). When executing trades, AI algorithms’ high processing speed and precision enable quick reactions to market conditions. AI-powered HFT has the potential to increase overall market efficiency, decrease bid-ask spreads, and boost market liquidity. It also prompts questions about market stability and potential dangers related to automated trading. Sentiment analysis is also possible with AI, which enables investors to assess market sentiments and forecast market movements. AI algorithms can offer insights into market movements and investor sentiments by examining news articles, social media feeds, and other sources of market sentiments. Using this information can be beneficial for managing portfolios and making trading decisions. According to a study published by Stanford University, AI is effective for sentiment analysis and can anticipate stock market movements with an accuracy rate of about 70 per cent when using social media data as a basis.
In the stock market, AI is revolutionising risk assessment and portfolio management. AI-powered models may assess the risk of particular investments by looking at historical data, market volatility, and other risk indicators. This aids investors in better risk management and portfolio optimisation. AI algorithms can also advise on portfolio rebalancing based on shifting market conditions. Due to the fast development of AI translation programs, Gartner Inc., a well-known global research and advisory business, predicted that by 2025, 70 per cent of all organisations globally will have operationalised AI structures.
Trading platforms powered by AI can increase liquidity in the market. AI algorithms can lower bid-ask spreads and increase market liquidity by supplying liquidity through automated trading. Trading is made more accessible and effective, which is advantageous for market players. According to a study in the Journal of Financial Markets, algorithmic trading, which includes AI-based methods, increases market liquidity, particularly for equities with lower liquidity.
While AI has many advantages for the stock market, there are risks and moral issues to be aware of. The reliance on AI algorithms raises issues regarding algorithmic biases, system flaws, and potential market disruptions. To solve these issues and preserve market integrity, promoting transparency, accountability, and responsible usage of AI in the stock market is essential. The stock market is changing due to AI, which enhances risk assessment and portfolio management, enables algorithmic and high-frequency trading, and improves trading decisions. The stock market’s increasing use of AI and its potential to improve liquidity and market efficiency demonstrates its significant impact. To maintain market integrity and investor confidence in this rapidly changing environment, Addressing the challenges and moral concerns around the use of AI is crucial.
Dr Neha Seth is an associate professor at Symbiosis Institute of Business Management (SIBM), Noida.
