Whenever markets crash due to events such as the current Coronavirus pandemic that triggers major macroeconomic shock, it becomes difficult for various asset management firms, hedge funds, brokerage firms and other financial institutions to manage their risks. A typical market crash is characterized by a drop in the value of the whole market by 10% or more within a few days. This could be attributed to panic selling of various financial assets such as stocks, bonds etc. Risk Management – market risk, operational risk, credit risk etc are primary concerns for financial firms in such stressed market conditions. In this type of market situation, systems are also stressed beyond normal and established processes are affected. Ironically “the risks in the risk management function” are exposed in these conditions.
Experts in most firms who are very much needed to manage the situation have been dislocated from their offices in this pandemic escalation. Communication has become a huge challenge. Most firms are not geared to handle this extreme event, unprecedented in our lifetimes. Chances of errors are bound to increase by leaps and bounds when such chaos is in play. Existing systems use predetermined rules that work great for established processes. When established processes cannot be used and improvisation is needed, this can introduce errors that could be a costly affair for the firm. In addition, adding new rules can take time and there may be limited time to test the impact of these rules.
AI could possibly provide solutions to these firms in these situations.
- AI is nothing but an amalgamation of algorithms that help a system to learn by itself based on the data fed to the system. AI models need to be designed to adapt quickly to changing market conditions such as increased volatility, increased volume of trades, decreased size of each transaction, changing trading patterns within the clients, traders etc.
- These AI models should not be frozen in time but should adapt quickly and still spot anomalous risk exposures even within the abruptly changed market dynamics. AI can’t provide 100% prediction that the market would crash due to an overnight event but AI can help organizations spot areas of exposures and assess the efficacy of their existing risk models and compliance policies in the wake of these events and help organizations to redefine/refine the processes.
- With the help of AI, firms can manage their risks and create a risk model that could save them from going bankrupt in the wake of such events happening overnight. Even if the firms survive such crashes their existing models can expose the risks they pose and can cause the firms billions of dollars across the globe. This could be rectified if solutions powered by AI, even if it serves as a 2nd line of defense in the short term, are in place. This is just one use-case of AI.
- There are several use-cases of AI that could be applied in the financial markets. AI has been implemented to study the 1987 market crash and a few other scenarios where markets crashed a whopping 10+%. Most of them have pinpointed sudden anomalies appearing in the data before the crash. These key anomalies appeared in organizational risk models which firms developed prior to the crash indicating that the system would not survive the crash.
- There are several case studies available where AI has been back-tested on data of previous market crashes. In 2019, the Finra annual report found that there were inadequate limit controls of various member firms. This would be even more pronounced in stressed conditions like now.
EagleAI™ is a solution powered by AI, ML and neural network algorithms from an expert team at Quantel that helps firms to build effective risk and compliance management systems. EagleAI™ helps firms to catch issues that were not even known to exist. Check out this Trading Risk Use Case.
Why Eagle AI™?
- EagleAi™ is not based on rules and adapts as data patterns change.
- EagleAi™ can recognize unexpected patterns and highlight potential errors.
- Unexpected conditions can impact your business. EagleAi™ can help minimize the pain.
- EagleAi™ represents a new era of intercepting anomalies.
- It uses advanced AI/ML algorithms for market/trade surveillance.
- Helps to check potential risk flags and reset the same.
- Can work on any type of data whether structured or unstructured data.
If you are looking to bolster your existing systems, EagleAI™ presents itself as a great solution. EagleAi™ offers flexible architecture and can be integrated with the existing systems completely seamlessly both on-premise as well as on cloud. It can do anomaly detection on batch data or on streaming real-time data. With its plug-in architecture, this product can be easily integrated with upstream and downstream systems and can adapt to any data format. Experts in Risk Management domain along with Data Scientists at Quantel AI have designed AI models that checks for Compliance rules across various financial markets. EagleAI™ comes with an array of Risk exposure models and Fraud detection models for Trading environments as pre-built tool boxes that can be snapped onto EagleAi™ as plugin extensions. Due to its seamless architecture that requires no integration with existing systems other than access to log files or database, EagleAi™ can go-live within weeks – providing a treasure trove of analytical insights along with hot spots of previously unknown/ignored risks. Dedicated teams from Quantel AI work with the clients all the way from a POC to a go-live.
What’s more, the Risk Managers/CROs can download a daily ‘Risk status’ report from the product to analyze their existing regulatory compliance processes as well as risk models. The product provides risk data for regulatory and compliance submissions as well.If you are interested to get a demo of EagleAI™ and how it can help your firm, please get in touch at firstname.lastname@example.org or call 1-833-EAGLEAI to Book a demo today!
- Introduction to EagleAi TradeWatch
- EagleAi Use Case Series: Fraud Risk – Undetected spoofing practice at a trading firm brings disrepute to the firm along with hefty fines
- EagleAi Use Case Series: Compliance Risk – A junior developer accidentally removes critical compliance checks which goes unnoticed for a very long time
- EagleAi Use Case Series: Market Data Risk – Bad market data causes a broker to reject orders from a client incorrectly which leads to a financial loss