Could MiFID II be the Unlikely Catalyst of AI Adoption in Capital Markets?

Blog entry

By: Terence Chabe, Business Development Manager, Colt Technology Services

We are a year on from MiFID II coming into effect, and while the regulation hasn’t caused any of the more apocalyptic consequences predicted, it has transformed the day-to-day life of those working in capital markets. One key change is the vast amount of data firms are required to produce and store. MiFID II demands that the data of every transaction completed by a firm must be stored for a minimum of five years, and new rules around transparency mean firms are obliged to produce various kinds of data for investors and regulators. The need to produce and store so much data makes complying with MiFID II an onerous task.

For many years, the focus for trading firms was on latency in order to trade faster, but in the post-MiFID II world, priorities have been turned on their head. The difficulties of compliance have given firms no choice but to invest in new, smart technologies that will help ease the task.

Implementation of smart technologies in capital markets is not new, smart order routers have been in existence since MiFID I, and algo trading is commonplace. Firms know that to maintain competitive advantage in today’s markets, they need to be looking actively at how to make effective investments in technology. As smart technologies have developed, and machine learning has advanced, artificial intelligence (AI) has started to play an increasingly important part in every industry.

In capital markets, AI used to be seen as nothing more than a buzzword. Even when AI adoption was becoming more mainstream in retail banking, those in capital markets were wary and slow to embrace the technology. Only with something as monolithic as MiFID II have capital markets firms been forced to look to AI and consider the value the technology can bring to their operations.

The savviest firms are beginning to see production of huge amounts of data not as a burden, but as an opportunity to use AI in ways that will help render an advantage over other market players. AI can enhance judgement and, in turn, augment human intelligence by evaluating and improving the decision-making process. AI systems can analyse large amounts of data and help traders make decisions based on the recommendations of the AI. Machines can analyse alternative datasets such as weather data or shipping data and from this help traders form secondary or leading indicators, offering a clear competitive advantage.

AI as a technology is in its infancy, even more so are its use cases in capital markets. In future, as AI becomes more advanced, we could see it come off the trading floor and be implemented into the client facing side of capital markets. Digital assistants powered by AI technologies such as machine learning will be able to understand the intent of a client and generate real-time responses in a flowing conversation. Soon, we could see traders’ interactions and dealings on the trading floor being directly augmented by artificial intelligence software. This would have huge repercussions and reshape capital markets, just as MIFID II has done.

While AI adoption is an exciting prospect for any capital markets firm, making a success of using the technology will have some dependencies. Implementing AI requires trust in the technology from a firm’s management and, to be at its best, AI needs to be implemented and integrated into systems. This requires a positive and forward-thinking approach to digital transformation from bosses. Even then, integration of AI systems could be an issue for some firms. For older firms that are heavily dependent on legacy systems, integrating AI will be a complex challenge. That said, there is an opportunity for more nimble firms not shackled by cumbersome legacy systems to be early adopters of AI and be the first to reap the benefits it brings.

A year on from MiFID II, capital markets firms remain in uncharted waters. The vast amounts of data that need to be stored and produced has rendered the market highly complex and new technologies are needed to make sense of it. Firms need to be investing in technologies like AI right now if they are to reap the benefits of the data-rich post-MiFID II market.