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Artificial intelligence is reshaping finance

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Last week Barclays’ credit card business struck a deal with Amazon to offer seamless customised shopping and payment services in Germany. 

The announcement drew little attention amid the US election, pandemic pain — and the cancellation of Ant Financial’s putative $37bn initial public offering. But investors and regulators should pay attention. That is not because of what the deal shows about German shopping habits, Amazon’s voracious expansion or Barclays strategy, per se. 

Instead, the German tie-up’s real significance is as a tiny, but unusually visible, sign of a feverish race under way at banks and tech companies to find ways to use big data and artificial intelligence in finance. Essentially, Barclays and Amazon are linking data with AI analysis to approve credit (or not) and predict what customised services clients will want next. “I personally think that the partnership with Amazon has been one of the most important things to have happened to Barclays in the past five years,” Jes Staley, Barclays chief executive, told me.

What happens next in this AI race could soon matter enormously — helping to determine the future winners in finance and the next big set of regulatory risks.

The AI platforms now being deployed in finance are exponentially more powerful than anything seen before. In particular, the capabilities unleashed by a subset of AI called “deep learning” represent “a fundamental discontinuity” from the past, a new MIT paper warns. 

Jack Ma, founder of Ant’s parent company, Alibaba, was arguably one of the first to spot the potential. It uses data on consumer and corporate digital activity to predict credit risk and provide customised services. That is a key reason why the Chinese finance group has expanded at such a dizzy pace. But western companies are racing to catch up both in retail — with Barclays’ German deal — and wholesale finance.

In theory, this could be beneficial as a way to “democratise finance”, as Mark Carney, former Bank of England governor, has observed. More specifically, these innovations should enable financial companies to offer consumers “more choice, better-targeted services and keener pricing”.

They should also cut corporate borrowing costs. Ant has used its vast data troves and AI to analyse credit risks in a way that its says enables the company to offer cheaper loans. Marshalled correctly, AI could also help regulators and risk controllers spot fraud more easily, and improve bank stress tests.

But there are enormous potential costs too. One of these is the propensity of AI programs to embed bias, including racism, into decision making. Another revolves around privacy risks.

A third is antitrust: since having a huge data base offers a compelling advantage in AI, there is a tendency for dominant companies to become ever more dominant. A fourth, related issue is herding: since AI programs are often constructed on similar lines, their use could reduce institutional diversity and undermine the resilience of finance.

However, the biggest problem of all is opacity. “The lack of interpretability or ‘auditability’ of AI and machine learning methods could become a macro-level risk,” a new paper from the Financial Stability Board notes. “Applications of AI and machine learning could result in new and unexpected forms of interconnectedness between financial markets and institutions.” Yikes.

So what should be done? One obvious and tempting idea might be for politicians to press the “pause” button. Indeed, that is what Beijing seems to be trying to do with Ant (although it is unclear how far the decision to halt the IPO reflects grand policy concerns, as opposed to politics.)

However, it will not be easy to stuff the AI genie back into the bottle. Nor is it necessarily a good idea, given the potential benefits. What would be far better is for policymakers and financiers to embrace four ideas.

First, companies engaged in AI-enabled financial activities must be regulated within a finance framework. That does not mean transposing all the old banking rules on to fintech; as Mr Ma has argued, these are not all appropriate. But central bankers and regulators must retain oversight of fintech and maintain a level playing field, even if that requires them to expand their oversight into new areas, such as the data being plugged into AI platforms.

Second, regulators and risk managers must bridge information silos. Very few people understand both AI and finance; instead, the people with these skills typically sit in different institutions and departments. This is alarming.

Third, we cannot hand all the creation and control of AI-enabled finance to geeks with tunnel vision; instead, the people crafting strategy must have a holistic view of their societal impact. 

But for this to happen, there needs to be a fourth development: politicians and the wider public must pay attention to what is under way, instead of outsourcing it to technical experts.

This will not be easy, given that AI is hard to understand. But the 2000s showed what can happen when geeks with tunnel vision go mad in finance and politicians ignore them. We cannot allow this again. If you thought the 2008 financial crisis was bad, just imagine one that moves faster and goes farther because it is enabled by AI. That should scare us into a policy debate right now.

gillian.tett@ft.com



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Copper hits record high with demand expected to rise sharply

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Copper prices hit a record high on Friday in the latest leg of a broad rally across commodity markets sparked by the reopening of major economies and booming demand for minerals needed for the green energy transition.

Copper, used in everything from electric vehicles to washing machines, rose as much as 1.2 per cent to $10,232 a tonne, surpassing its previous peak set in 2011 at the height of a previous commodities boom.

The price has more than doubled from its pandemic lows in March last year due to voracious demand from China, the biggest consumer of the metal, and also investors looking to bet on a big uptick in the global economy and protect their portfolios against potential for rising inflation.

Government stimulus packages and the shift towards electrification to meet the goals of the Paris agreement on climate change are expected to fuel further demand for the metal, which analysts and industry executives believe could hit $15,000 a tonne by 2025.

“Capacity utilisation rates of our customers are the highest in a decade and that’s before stimulus money both in Europe and the US has started to flow,” said Kostas Bintas, head of copper trading at Trafigura, one of the world’s biggest independent commodity traders. “That will be significant.”

The US and Europe were becoming significant factors in the consumption of copper for the first time in decades, he added. “Before, it’s effectively been a China-only story. That is changing fast.”

Concerns about the long-term supply of copper due to lack of investment by large miners has also pushed up prices. There are only a few large projects in a development, while most of the world’s easily produced copper has already been mined.

“The current pipeline of projects likely to start producing in the next few years represents only 2.3 per cent of forecast mine supply,” said Daniel Haynes, analyst at banking group ANZ. “This is well down on previous cycles, including 2010-13 when it reached 12 per cent.”

The upward march of other raw materials is showing no signs of abating. Steelmaking ingredient iron ore traded above $200 a tonne for the first time as China returned to work after the Labour Day holidays in early May. 

In spite of production cuts in Tangshan and Handan, two key steelmaking cities in China, analysts expect output to remain solid over the next couple of quarters. 

“Recent production cuts in Tangshan have boosted demand for higher-quality ore and prompted mills to build iron ore inventories as their margins are on the rise with steel supply being restricted,” said Erik Hedborg, a principal analyst at CRU Group.

“Iron ore producers are enjoying exceptionally high margins as around two-thirds of seaborne supply only require prices of $50 a tonne to break even.”

Elsewhere, tin on Thursday rose above $30,000 a tonne for the first time in a decade before easing. Tin is used to make solder — the substance that binds circuit boards and wiring — and is benefiting from strong demand from the electronics industry, which has been lifted by growing numbers of stay-at-home workers.

US wood prices continued to race higher ahead of the peak in the US homebuilding season in the summer with lumber futures rising to a record high above $1,600 per 1,000 board feet length, up from $330 this time last year.

Agricultural commodities also continued to rally as a result of a particularly dry season in Brazil, concerns about drought in the US and Chinese demand. Strong increases in food prices have started to affect global consumers. Corn rose to a more than eight-year high of $7.68 this week, while coffee has risen almost 10 per cent since the start of month, hitting a four-year high of $1.54 a pound this week.



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Wall Street stocks waver as investors await US jobs data

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Wall Street stock markets wavered, with tech losses dragging down some indices, but remained close to record highs ahead of US jobs data on Friday that could pile pressure on the Federal Reserve to rethink its ultra-supportive monetary policies.

The S&P 500 was up 0.2 per cent in the afternoon in New York, hovering slightly below its all-time high achieved late last month. The peak was reached following a long rally supported by the Fed and other central banks unleashing trillions of dollars into financial markets in pandemic emergency spending programmes.

The technology-heavy Nasdaq Composite, however, which is stacked with growth companies sensitive to changing interest rate expectations, was down 0.5 per cent by the afternoon in New York, the fifth straight losing session for the index.

The divergence of the two indices followed patterns from earlier this year, when investors sold out of growth companies over fears of rising rates and poured into more cyclical plays. That trade has been more muted recently but could be coming back, said Nick Frelinghuysen, a portfolio manager at Chilton Trust.

“It’s been a bit more ambiguous . . . in terms of what regime is leading this market higher, is it quality and growth or is it value and cyclicals?” Frelinghuysen said. “We’re in a little bit of a wait-and-see mode right now.”

The 10-year Treasury yield, which rose rapidly earlier this year amid inflation fears, declined 0.05 percentage points to 1.56 per cent on Thursday.

In Europe, the Stoxx 600 closed down 0.2 per cent, hovering just below its record high reached in mid-April.

With the US economy close to recovering losses incurred during coronavirus shutdowns, economists expect the US government to report on Friday that the nation’s employers created 1m new jobs in April. Investors will scrutinise the non-farm payrolls report for clues about possible next moves by the Fed, which has said it will continue with its $120bn a month of bond purchases until the labour market recovers.

Up to 1.5m jobs would “not be enough for the Fed to shift”, analysts at Standard Chartered said. “Between 1.5m and 2m, there is likely to be uncertainty on Fed perceptions.”

Central bankers worldwide had a strong “communications challenge” around the eventual withdrawal of emergency monetary support measures, said Roger Lee, head of UK equity strategy at Investec.

“If it is orderly, then you can expect a gentle continuation of this year’s stock market rotation” from lockdown beneficiaries such as technology shares into economically sensitive businesses such as oil producers and banks, Lee said. “If it is disorderly, it will be a case of ‘sell what you can’.”

On Thursday the Bank of England upgraded its growth forecasts for the UK economy but stopped short of following Canada in scaling back its asset purchases.

The BoE maintained the size of its quantitative easing programme at £895bn, while also keeping its main interest rate on hold at a record low of 0.1 per cent. The British central bank added that while its asset purchases “could now be slowed somewhat” after it became the dominant buyer of UK government debt last year, “this operational decision should not be interpreted as a change in the stance of monetary policy”.

Sterling slipped 0.1 per cent against the dollar to $1.389.

The dollar, as measured against a basket of trading partners’ currencies, weakened 0.4 per cent. The euro gained 0.4 per cent to $1.206.

Brent crude fell 1.1 per cent to $68.17 a barrel.



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Gensler raises concern about market influence of Citadel Securities

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Gary Gensler, new chair of the Securities and Exchange Commission, has expressed concern about the prominent role Citadel Securities and other big trading firms are playing in US equity markets, warning that “healthy competition” could be at risk.

In testimony released ahead of his appearance before the House financial services committee on Thursday, Gensler said he had directed his staff to look into whether policies were needed to deal with the small number of market makers that are taking a growing share of retail trading volume.

“One firm, Citadel Securities, has publicly stated that it executes about 47 per cent of all retail volume. In January, two firms executed more volume than all but one exchange, Nasdaq,” Gensler said.

“History and economics tell us that when markets are concentrated, those firms with the greatest market share tend to have the ability to profit from that concentration,” he said. “Market concentration can also lead to fragility, deter healthy competition, and limit innovation.”

Gensler is scheduled to appear at the third hearing into the explosive trading in GameStop and other so-called meme stocks in January.

Trading volumes in the US surged that month as retail investors flocked into markets, prompting brokers such as Robinhood to introduce trading restrictions that angered investors and drew the attention of lawmakers.

The market activity galvanised policymakers in Washington and investors. Lawmakers have focused much of their attention on “payment for order flow”, in which brokers such as Robinhood are paid to route orders to market makers like Citadel Securities and Virtu.

That practice has been a boon for brokers. It generated nearly $1bn for Robinhood, Charles Schwab and ETrade in the first quarter, according to Piper Sandler.

Gensler noted that other countries, including the UK and Canada, do not allow payment for order flow.

“Higher volumes of trades generate more payments for order flow,” he said. “This brings to mind a number of questions: do broker-dealers have inherent conflicts of interest? If so, are customers getting best execution in the context of that conflict?”

Gensler also said he had directed his staff to consider recommendations for greater disclosure on total return swaps, the derivatives used by the family office Archegos. The vehicle, run by the trader Bill Hwang, collapsed in March after several concentrated bets moved against the group, and banks have sustained more than $10bn of losses as a result.

Market watchdogs have expressed concerns that regulators had little or no view of the huge trades being made by Archegos.

“Whenever there are major market events, it’s a good idea to consider what risks they might have placed on the entire financial system, even when the system holds,” Gensler said.

“Issues of concentration, whether among market makers or brokers at the clearinghouse, may increase potential system-wide risks, should any single incumbent with significant size or market share fail.”



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