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AVOIDING THE PITFALLS OF AI IN POSITIONAL TRADING

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By Pan Yiannakou, CEO of Swarm Technology

 

Artificial Intelligence (AI) has advanced exponentially in recent years. It is widely regarded as a must-have tool to help traders distil vast sets of data to make the most profitable decisions quickly, but how does this work when taking longer term positions? Chief Executive of Swarm Technologies, Pan Yiannakou, explores the traps to watch out for when deploying AI in slower, positional trading.

Once a decision has been made to take a position in a market, the initiator must quickly consider a vast array of options to achieve the most profitable outcome – the exact timing; execution methodology; instrument; location and/or intermediary, to name just a few.

Take the decision to buy gold, for example. A trade can be executed immediately, after a few seconds, a few minutes or a few hours. A trader can either ‘lift the offer’ or ‘sit on the bid’; they can set a price target (below) or set a price trigger (above). They could also wait for some other event to trigger the trade. A trade could be made in the cash market, futures, options, as a contract for difference (CFD), or through an exchange-traded fund (ETF). The trader can conduct their business on an exchange, through a broker or directly with a counterparty.

Without restrictions, there are more than a million combinations of ways to gain a long exposure in gold. To add another layer of complexity, these variations are not static and anything from updated broker fees to shifting liquidity to changing counterparties has the potential to exact a significant cost impact.

In an environment where speed is critical and the variations are so vast and constantly moving, the case for deploying AI to solve this data-rich, complex, multi-dimensional problems is clear: AI is powerful enough that not only can it perform well in a dynamic, complex environment, it can also identify genuine opportunities hidden in the data that humans could never recognise.

However, high-frequency trading also has its limitations, particularly issues with liquidity. Sometimes, it is not possible to put to work all the funds required by participants in short term trades. The alternative is slower trading: taking positions that run for hours, days, weeks or longer. Berkshire Hathaway has famously held Wells Fargo, Coca-Cola and American Express stocks for over 25 years. But slower, positional trading presents a particular set of challenges for AI which could immediately and directly hit profitability.

 

Weaknesses of AI

  1. Biased data

AI is designed to identify biases, and to adapt to new ones. If historical data contains a bias that is suddenly no longer valid, that can result in poor decisions.  Slow trading limits the speed at which AI can adapt. If there is a chaotic shock that changes the bias, damage can be difficult to avoid. Consider Covid-19’s impact on global financial markets. There was the initial reaction, which led to an almost instantaneous shift in bias across all asset classes. By the time AI systems pick up the switch in bias, the damage has been done.

  1. New price action

AI works well when trained on large amounts of historic data, or when sufficient new data is being  generated quickly enough. When markets move in a way they never have done before, there is no historic data for AI to base decisions on. Some events are so rare – like the subprime crisis of 2007-08 – that there may not be enough examples in the past.

  1. Random clusters

AI is very efficient at finding patterns in large amounts of data. But this can be a weakness. Often, large amounts of numeric data such as price contain random patterns – ‘ghosts’ in the data, or random clusters as they are known. There is a simple test to identify this problem: present an AI trading system with a series of genuinely random prices. Will it find patterns and generate trading signals? The answer is usually ‘yes’. AI is so good at finding patterns, it will find random patterns too. Executing trades based on patterns that do not contain a genuine bias will cause eventual losses due to trading costs.

  1. Feedback

There is a strong feedback loop that degrades the value of patterns that are easily identified by AI. Consider a specific event that leads to a price gain of 5 per cent in a particular market, for example. If that exact same event occurs in the exact same circumstances again, the participants will all know that it led to a 5 per cent rally the previous time. When the pattern repeats, sellers are likely to sell before the 5 per cent target is hit, not wishing to be the last out. Even with exactly the same trigger and exactly the same starting conditions, the market would behave differently. The more participants that identify the same opportunity, the less effective that opportunity is.

 

Trade like an ant!

AI trading solutions do not have to be limited to fast trade execution. There are ways of using AI that avoid the pitfalls listed above. Swarm Technology, for example, uses the natural principles of swarm intelligence in its AI solution; this is a form of biomimicry. Swarm does not use AI for pattern recognition or to aid trade execution. It generates a Swarm Matrix, that shares information between all the markets and the systems applied to those markets; in a similar way to that of ants in a colony, who share information and adapt their behaviour accordingly.

While AI does have its drawbacks in slower, positional trading, it is not impossible to overcome the pitfalls.

 

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Finance

WHY PEOPLE ANALYTICS WILL PLAY A PIVOTAL ROLE IN SOLVING THE FINANCIAL SERVICES INDUSTRY’S SKILLS CRISIS

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Daniel Mason, Vice President EMEA, Visier

 

Successfully guiding teams of employees through the post-pandemic landscape will not be easy for any business, but nowhere is this more apparent than in the financial services sector. Here, leaders face the formidable challenge of rebuilding working environments against the backdrop of huge industry uncertainty, caused by the most turbulent 18 months in living memory, as well as an increasingly concerning global skills gap.

In order to succeed, not only do they need to create highly compelling environments that entice new and existing employees alike, they must also work to proactively identify areas where additional improvements need to be made. Doing so will enable swift and decisive action to be taken before seemingly small issues start to have a major impact on overall business performance or staff retention.

 

Storm clouds are gathering on the horizon

It’s safe to say the financial services industry garners more media attention than most when it comes to working conditions. With well over a million people employed in the UK alone, scrutiny into key areas such as work-life balance, job pressures and pay is near constant.

In order to gain better insight into current job satisfaction within the sector, Visier recently conducted a new study focussing on how both UK employees and HR leaders feel their businesses are managing during this difficult time, and how it is affecting both current performance and future prospects. The research revealed some worrying statistics that point towards a potential avalanche of resignations in the near future, unless something is done to prevent it.

Why is this? Put simply, too many financial services organisations don’t appear to know their employees are unhappy and of those that do, most don’t fully understand the reasons behind it, meaning they can’t effectively tackle them. This article will discuss these findings and their implications in more detail, before exploring how people analytics can be used to spot key trends – both positive and negative – early, and boost employee experience/morale at this crucial time.

 

Learning new skills is increasingly important to both employees and businesses

According to Visier’s study, over half (52%) of employees in the financial services industry expect to actively look for a new job outside of their current company in the next 12 months, with almost a quarter (24%) already doing so. In light of these alarming figures, you’d be forgiven for assuming financial services organisations have failed to adapt to Covid-enforced ways of working. However, this isn’t the case at all, with the vast majority of those surveyed reporting that their companies have reacted impressively to the pandemic.

There are, of course, multiple reasons why workers may feel compelled to move on, even if they have a positive overall connection with their current employer. While each case is unique, the three most common reasons cited in the study were, perhaps unsurprisingly, ‘poor work-life balance’ (43%), ‘salary’ (33%) and ‘feeling undervalued’ (25%).

Following closely behind in fourth place was ‘not being encouraged to learn new skills’ (19%). However, there’s a growing school of thought that this has a much bigger influence on employee satisfaction than the raw data might suggest. Work-life balance and salary have always been major drivers of change, and learning new skills can go a long way towards helping workers address these by improving the value they bring, as well as boosting their overall day-to-day efficiency. The findings backed this up, with over half (55%) of employees admitting they are worried that failure to develop new skills will lead to their careers stalling.

The study also uncovered a strong feeling amongst both financial services employees and HR leaders that learning new skills is a crucial factor in the future competitiveness of their organisations.  Just 59% of employees felt confident their employer was bringing in the right people to keep pace with clients’ expectations for digital services. Meanwhile, over two-thirds of HR leaders believe that the sector’s lack of available candidates is holding back their company’s digital transformation strategy. As such, not only do employees see a lack of skills training and opportunities as a blocker to their own progression, it also presents an existential threat to the organisations they work for.

 

People analytics is playing an increasingly pivotal role

As financial services organisations continue to work through the disruption caused over the past 18 months, they need to be conscious of key factors impacting employee retention, as well as address any skills gaps acting as barriers to effective digital transformation. Investing in the right new learning opportunities and upskilling current employees will be crucial in reducing unwanted churn and ultimately boosting long-term competitiveness.

People analytics tools give businesses – in financial services and beyond – the real-time intelligence they need to achieve this, enabling them to grow and thrive regardless of what’s put in their path. Not only can people analytics help identify worrying employee trends such as disenchantment about skills training early, it also provides the insights needed to fix issues before they can significantly impact operational effectiveness.

As the data shows, employee satisfaction isn’t the only factor at play. Job happiness is also tied to whether employees believe the business is making the right decisions for their future. However, without the right tools in place leaders must operating on gut feel alone, which is rarely a good formula for success.

Every day, a growing number of decision-makers are using people analytics to uncover the key insights needed to make informed decisions regarding who to hire, who to reskill and who to promote. This is no coincidence. The move towards people analytics at scale is not a passing craze, but the acceleration of a powerful trend that’s been gathering momentum for almost twenty years. Maybe it’s time your business sees what all the fuss is about?

 

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Business

BECOMING THE CEO: THIS IS HOW CFOS CAN SECURE THE TOP JOB

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Mark Freebairn, Partner and Head of the Board and CFO Practices at Odgers Berndtson, explains what CFOs need to do if they want to become CEOs 

 

For some time now, there’s been a very clear trend in CFOs progressing onto CEOs. It’s a trend that should come as no surprise to executive leaders. With more CEOs under increasing pressure, many CFOs have become the nominal second in command, often taking non-finance related responsibilities off their CEO’s plate.

As result, CFOs have begun playing a more strategic and commercial role which has inevitably broadened their remits beyond the finance function. With many CFOs breaking out of the traditional financial management confines, executive teams and boards have begun to realise that finance and general management are more closely aligned than they previously thought. This has given CFOs more opportunities to gain experience relevant for the CEO position. From owning P&L business units to engaging with external investors, the CFO’s evolving remit is making them likely candidates for the top job.

That’s not to say it’s a done deal for anyone who is currently a CFO. The CEO jobs market is comparatively small, CEO turnover is typically slow, and competition is intense. So below, I’ve outlined the key areas CFOs should gain experience in and the opportunities they should capitalise on if they want to compete for the CEO positions out there.

 

Mark Freebairn

Take responsibility for P&L business units 

Overseeing specific business units is a natural extension of the CFO’s responsibilities. It provides experience of managing products, costs, and revenue generation – all of which are staple requirements for the CEO role. But it also provides operational credibility internally, which will prove advantageous for any CFOs lining themselves up as a succession candidate to their own CEOs.

If possible, CFOs should take on responsibility for turning around a failing business unit. This is the fastest way of gaining commercial experience relevant for a CEO role. Particularly as economies emerge from the pandemic, boards will be looking for leaders who can demonstrate an ability to drive growth and new business despite significant internal and external challenges.

Likewise, CFOs should involve themselves in other business functions. Whether it’s procurement and the supply chain, or facilities and security, CFOs should play a role outside of the finance function in order to gain broader business experience.

 

Build a highly-autonomous finance team 

The CFO’s role within organisations and their ability to easily expose themselves to other P&L units makes them suitable candidates for CEOs. However, CFOs are only as good as the team around them. Building a high-performing finance team that can drive the day-to-day operations of the function will have several outcomes. Firstly, it will free up a CFO to take on more responsibility around the business and gain more time with their CEO. Secondly, it’s a valuable proof point that CFOs can use in any interview to demonstrate their ability to build strong teams – as a CEO, building a strong cadre of trusted executives is crucial for success.

This should be a team that can be trusted to perform autonomously, with a strong second in command that the CFO can rely upon.

 

Take on a non-executive director (NED) role 

While financial management is central to any successful organisation, CFOs still need to develop expertise outside of the function if they are to step up as CEOs. Taking responsibility for P&L business units will provide this, however it won’t provide a CFO with the same board-level perspective that a NED role will.

Taking on a NED role will not only help CFOs to understand what boards expect of CEOs but it will also provide experience of a different kind of leadership; one that is less hands on and more about guidance and mentorship.  Within the commercial sector, there are board roles among smaller quoted companies, those backed by private equity, or family owned businesses. Advisory boards and subsidiary boards are also a good option.

On the public sector side, board roles exist within organisations owned by or reporting to government. These include major infrastructure operators, the NHS, regulators, museums and other arts institutions. Likewise, a charity trustee role (while unpaid) is similar and will help to develop both a CFOs network and board skills.

Auditing, budgetary reviewing and balance sheet responsibilities are often sought after skills in non-executive directors, making CFOs ideal for these positions.

 

Take on internal leadership positions 

These types of leadership positions should be separate to the finance function and can include things like internal workstreams, strategic initiatives such as I&D and sustainability, or CSR projects. The benefit of taking on this responsibility is two-fold. It helps build necessary leadership skills and provides leadership experience. But it also showcases a CFO within the business in a leadership capacity outside of finance. The later will be beneficial for any CFOs looking at internal progression onto the CEO position.

Mentoring achieves similar outcomes. This helps build leadership skills and can lead to greater exposure around the business. What’s more, any mentee may later become a useful contact in a CFOs network.

 

Network outside of the organisation 

CFOs often underestimate the power of a personal network. Building relationships with other senior leaders will enable a CFO to generate career opportunities that can lead onto CEO appointments. While professional networks within the CFO community are valuable, networking outside of these types of environments is likely to be the most profitable for career advancement.

Any CFO looking to make the jump to CEO should build relationships with a variety of third parties. These include shareholders and brokers, investors, M&A specialists, bankers, and even lawyers. A CFOs experience and perspective can be incredibly valuable to these types of professionals so getting on their radar shouldn’t be difficult. Making the effort to build a relationship with them will pay dividends in the long run, and may lead to hearing about, or if you’re good enough, even being recommended for a CEO position.

 

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