Old Dog, New Tricks
From cryptocurrencies to InsurTech startups, the world of finance is a diverse playing field. But to really understand the impact of disruptive technologies in finance, you have to look back to the first applications of advanced software within the market. Lane Mendelsohn, Vice President of Market Technologies, has 22 years of experience in the industry, working alongside his father and influential technologist Louis Mendelsohn to provide highly accurate trading forecasts using AI.
“We were a FinTech company before the term FinTech even existed,” says Lane. “My father, Louis Mendelsohn, started our company in 1979. I literally grew up in this business. My father took a leap of faith and left a very stable well paid job as a hospital administrator in Florida. In the early 1980s, he developed the first piece of software available on a personal computer in the entire world for back testing.”
Back testing allows traders to test strategies without using real money. From a trader’s perspective, says Lane, it was revolutionary. But instead of offering a product that looked at a single stock or currency in isolation, Louis Mendelsohn developed a concept called intermarket analysis that took globalisation into consideration. The need to correlate such huge quantities of data led him back to the artificial neural networks he had experienced at Carnegie Melon University. Since 1991, Market Technologies has used VantagePoint Software, powered by Artificial Intelligence. But what is it, and how does it work?
“Let’s say someone’s trading Apple stocks. What the software does is download data for Apple, looking back several years. VantagePoint differs from most approaches because it won’t stop there. What it will then do is find the data for any other markets, stocks, currencies, and anything else that impacts the price of Apple. It’s doing it very quickly – we’re talking seconds. Then what it will do is produce a forecast that’s up to 86 per cent accurate. If a trader knows this, they can make an intelligent decision.”
As Market Technologies approaches its 40th anniversary, the company has watched many different companies come and go. How has the business retained its impressive longevity?
“If you have great marketing but you don’t have something that actually works, you can attract some attention but you won’t have longevity. Marketing is not really our forte. Our forte is technology, which means that we’ve developed something that really works.”
Committing to a relevant solution has definitely paid off, but over the years the company has taken its fair share of risks.
“When my father said he was going to quit his job to develop software for computers, my grandfather said that nobody has computers, so who are you developing software for? I can tell you he got a lot of pushback. But he could envision that the markets were going to become more global. That was a risk, to make these bold claims. But the risks he took mean that our customers don’t have to. Of course, there’s always risk when you’re investing in financial markets. The idea is how to minimise these risks, and that’s what our AI technology does.”
To date, Mendelsohn’s pioneering company has helped 20,000 traders in over 140 countries. But what, in Lane’s opinion, is the biggest challenge facing traders today?
“The biggest challenge is uncertainty. Uncertainty translates into a lack of confidence. When you lack confidence, it’s very difficult to make decisions. If people were certain that a stock was going to go up, then they would buy it and make money. Markets can be very volatile… People have lost their entire life savings. Volatility is not a bad thing – if a market isn’t moving, there’s no opportunity to make money.”
The question is, how do you predict an ever changing market? This, of course, is where AI comes in.
“We use AI to look for patterns, relationships, influences… Anything that will push and pull prices in one direction or another. If you want to know where something is going to go, you need to ask what’s going to drive it in that direction. Artificial Intelligence is a buzzword – companies say they’re using AI because it will make them look good. For us, we’re accomplishing a task that a human couldn’t accomplish, and that allows our customers and traders to become much more successful. It’s literally changing lives.”
When it comes to bright eyed FinTech startups (as well as any other company), Lane has some valuable advice.
“You have to be a visionary. You have to measure the present, but you’ve got to ask what problems people will face down the road and start working on those solutions. If you have a problem and you’re only just looking at the solution, you’re late.”
After the cryptocurrency boom, closely followed by a string of dramatic crashes, Lane also advises caution when it comes to digital currencies.
“If we can’t predict something with a very high degree of accuracy, then it’s not worth forecasting for. A lot of those currencies are also manipulated. If you have people controlling the scenarios, that’s unpredictable. It’s the same thing with penny stocks. They’re highly manipulated, there’s a lot of fraud, and most are not around for very long. I think there’s a place for cryptocurrencies, maybe Bitcoin, there’s a lot that are competing… But it’s more of a gamble than an investment for people.”
So, Lane is clearly not enamoured with alternative financing strategies. But how will Artificial Intelligence continue to disrupt financial trade and investment?
“If AI is correctly applied, it will help people to minimise risk and protect their savings. But remember, it’s a tool, and if it’s misused then people won’t gain the benefits. It’s only as good as the operator and how it’s been developed. If properly implemented and executed, AI has the potential to have a tremendous impact, specifically helping to preserve capital in times of volatility as well as help it to grow.”
According to Lane, we have only scratched the surface of machine learning techniques – and not just within finance. As a cancer survivor, he’s particularly interested in AI’s application within healthcare.
“Clearly AI is already making a positive impact in many areas. It’s now being used to predict whether or not certain cells will become cancerous. I can only imagine where that’s going to be five years from now, 10 years from now, 20 years from now. It’s unbelievable. In autonomous driving, you could get to the point where there are literally no more car accidents. I can kind of envision where it’s going, but at the same time I have no idea how much it will impact our lives.”
As always, the future of financial trading (and everything else) remains uncertain. But Lane is confident that Market Technologies will be able to use AI and data analysis to deal with whatever comes next.
“We have no plans to stop investing in research and development. The R&D has to continue because the world is continuing to evolve and change. If at one point in time you have a technology that works, but don’t continue to refine it, then everything else will move forward. ”
In short, Market Technologies has applied predictive technology to a notoriously unpredictable industry and succeeded. Clearly not all incumbent financial businesses are challenged by disruptive innovation. According to Lane, this is the result of investing in new technology and pursuing a forward looking strategy. Whilst traders often have to make challenging choices, predictive AI based software is empowering them to make more informed decisions… It looks like the devil really is in the data.