Quantitative trading is on the march and machines are likely to handle a much greater share of dealing in assets in the years to come, diluting or replacing the role now played by human beings, according to Scott Kerson, head of systematic strategies at Gresham Investment Management LLC.
“The more commoditized the activity, the more likely it’ll be taken over by machines,” Kerson said in an interview at an event organized by the London Metal Exchange in Singapore. “So anything that’s kind of the same all the time, there’s the kind that you want to write a piece of code to do.”
Assets managed by computer-driven funds have expanded in scope in financial markets, with the trend rolling back the human element in identifying and executing strategies. Among the big directions the industry will now take is quant trading moving beyond its role of identifying alpha -- pinpointing opportunities for returns above the benchmark -- to replacing more of the many tasks that are now being done by human beings, according to Kerson.
“I believe quite strongly that there’s only really one way, one direction for the presence of systematic trading,” said Kerson, drawing a parallel with the increased use of auto-pilots in planes and tap cards in payment systems as developments that have led to less human involvement, especially for labor-intensive tasks. “That’s all we’re really doing, because we’re taking a decision process and teaching the machine how to make that decision.”
Markets from commodities to equities have been roiled this year by concerns growth may be slowing, and from the trade war between the U.S. and China. But “our general perspective is that systematic trading should be agnostic to the environment one is in,” said Kerson. “What really matters for us most, and for our system to be successful, is for there to be an underlying trend.”
There may be other opportunities. Kerson highlighted the intersection of “big data, machine learning and techniques” as a frontier for change. On top of that, there’s scope in so-called exotics, a reference not to the physical form of an asset, but items traded in markets where there’s limited visibility. These include electricity, asphalt and carbon credits, according to Kerson.
“Our focus is really how we bring quantitative techniques to markets that typically, they’ve never been applied to before,” he said.
Still, not all areas may be suitable for growth in quant trading. “For example, if you’re a physical producer or consumer and you’re working on developing an asset, you’re working with your bankers on how to hedge your capital, that sounds very much like a macro-discretionary kind of thing,” he said. “That’ll almost inevitability be dominated by human decision-making.”
Gresham Investment manages more than $7.2 billion, with clients including public and corporate pension funds, endowments, corporations, health systems, insurance companies, pooled investment vehicles, other investment advisers, and sovereign wealth funds.
And what of the future, especially 2019? “I’d have to ask the models,” he said.