The challenges of playing the market against artificial intelligence: Don Pittis – Business

Elon Musk has raised the alarm about artificial intelligence wiping out humanity, but the SpaceX and Tesla boss still hasn’t warned you that AI may be coming for your investments.

When Google-owned DeepMind’s AlphaGo conquered a human champion at the game of Go last year, it was widely regarded as a watershed in machine learning. 

“Go is considered to be the pinnacle of game AI research,” said DeepMind’s Demis Hassabis at the time.

Bigger game, bigger stakes

But the money game is bigger, and there is a lot more at stake.

​Last week the business news service Bloomberg reported that Japan’s third biggest lender is taking AI into the equities market.

“Mizuho Financial Group Inc. will start artificial-intelligence trading this month to bolster its Japanese equity business,” Bloomberg reporter Takahiko Hyuga wrote, saying it would offering algorithm-based services to institutional clients.

Lee Se-Dol, one of the greatest modern players of the ancient board game Go, reacts during a press conference after losing the second game to Google’s DeepMind in Seoul on March 10, 2016. (Jung Yeon-Je/AFP/Getty Images)

The firm is far from alone. And like others who are already using AI, expecting to win at the stock market game, the Japanese giant has been far from forthcoming about how its trading strategies will work.

Just as AlphaGo did to beat a champion player, in theory AI can use machine learning, sometimes called deep learning, to pick investment strategies based on how markets have reacted in the past.

In the classic example of machine learning a computer is given thousands of pictures of cats, gradually using trial and error to create a complex mathematical description of cat-ness, allowing it to reliably recognize cat pictures it has never seen before.

The flash crash and computerized trading

In the case of markets, the computer would recognize various hidden clues for when markets will rise or fall, buying before a rise and selling before a fall.

Even before adding artificial intelligence to the trading process, the introduction of non-AI computerized trading has resulted in unpredictable market events. 

During the flash crash in 2010 when U.S. stocks plunged by trillions of dollars over less than half an hour and then just as suddenly rebounded, fortunes were won and lost during the moments of chaos. 

While a single British trader working from his London apartment took the blame for making the initial…

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