Farecast (recently acquired by MIcrosoft) does just what you want when making an airplane ticket purchase: it predicts if the price is going to go up, down or stay level and advises when you should buy (now, wait). Timberpost is a small company founded by Peter Ross and Tim Taylor (Peter was a professor at Edinburgh University when I was there studying AI and Tim completed his PhD in the same department). Timberpost’s product – TRAITS – takes a crack at a real chestnut of an AI problem: predicting the stock market. The difference with this solution appears to be that it actually does a good job of it.
The graph below shows the performance of a hedge fund run (in simulation) by TRAITS compared against the FTSE EuroFund 300 Index.
A recent overview published by Timberpost says:
This portfolio is currently showing an annualised return of +23%, which would rank it 6th out of 200 peer funds according to the latest performance data on real European Long/Short Equity hedge funds published by EuroHedge magazine.
Timberpost describes their technology as follows:
Many machine learning techniques have been applied in finance, including neural nets, genetic algorithms, reinforcement methods and rule induction. We are developing a new approach that is inspired by ideas about how the human immune system functions. Like the immune system, our software can not only discover effective responses to new conditions (in our case, potential trading opportunities), it also adapts to remember past successes in order to be able to re-activate them quickly when conditions change.
In biological systems, recognition happens by molecular binding. In our software, recognition is based on elaborate mathematical expressions that describe features of the behaviour of stocks. The system is designed to be efficient; it can look at many thousands of elaborate expressions per second.