DIY Hedge Funds Unleash AI to Crack Wall Street’s Secret Code

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1:32Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to Bloomberg Business Week with Carol Masser and Tim Stenevek on Bloomberg Radio. It's one of the most read stories on the Bloomberg Terminal. It's about how Gen. AI is transforming retail investing. It's enabling individual traders to build and execute institutional-grade quant strategies that have once been reserved for major Wall Street hedge funds. Bernard Goiter is one half of the duo behind this story. He's U.S. options reporter for Bloomberg News. He joins us here in the Bloomberg Interactive Brokers Studio. Congratulations on the story.

2:09I'm struck by all of the individuals you highlighted in the story because there's this pattern that has emerged. They were doing one thing before. They quit that job to vibe code or create some sort of AI solution to trading that they think can get them of salary. How are they doing it? Yeah, I think it's really indicative of that broader trend in retail investing we've seen since the pandemic with people putting aside what they were doing before and jumping in and trying to make a living out of trading, really. And these are some of the more professional side of the retail investing world. I think we often like to characterize retail investors as having this really high risk appetite.

2:50But if you're doing this as a job, actually your risk appetite is going to be pretty low and reasonable. So I think one of the guys said he put 5 % of his portfolio into this kind of magic money machine that's trading for him. Somebody else was doing one trade a day on Robinhood, but it was an agentic AI. And he goes and does his day job in IT and lets this thing in the background. He'll get a notification on his phone sometime during the day being like, your trade went through. And that's just the way these people are doing it. I mean, there's another guy who's got a stop loss at 10%. Once his position drops by more than 10%, that stop loss kicks in automatically.

3:23And that's the same as if you were in a seat at a hedge fund. It's a similar kind of system. And I think what the AI has done is it's grabbed all of that information from all of the best practices across Wall Street and is now giving that to ordinary people. So, right. I think folks have always tried to kind of crack the code, right, of what goes on at some of these elite firms and these hedge funds. But AI has given them a tool that's getting them closer to it. It has, but bear in mind that this is giving people the same kind of tools that maybe Wall Street had eight years ago, which probably means that Wall Street is way, way, way further ahead of some of these people.

3:57But it definitely makes it more viable to try and execute trades automatically using AI. And more and more people seem to be taking that on. Vlad, the CEO of Robinhood, posted that 100 ,000 people had plugged into their Agentsic AI system. They're one of the brokers that offers this. Other brokers offer it apart from Robin, who you read about, Futu Holdings, Moomoo, Public Holdings, all rolling this out. Are there notable holdouts of retail trading firms or firms that are popular with retail traders that are saying no to this tech as of now? I think some firms are more cautious. So traditionally, Charles Schwab is generally on the more cautious end in terms of this stuff.

4:40They do have API technology. You can plug a system into Schwab. But in terms of like enabling people to kind of trade automatically through AI, I definitely point to them. And the big one is really the banks. A lot of people will use the brokerage that their bank owns to trade through. And those really aren't offering that at this point. They're still kind of pushing people towards more traditional wealth management services. I mean, is this the, you know, we always talk about financial disruption, right? And we talk about fintech and all these different things. But I feel like is this the thing that really disrupts kind of Wall Street and trading as we know it?

5:17I think that's what some people in the industry would like to think. So Anthony Denier, the Webull president, was quoted in the story as saying this is zero commission 2.0. I thought that was a remarkable thing for him to say because that changed retail trading. It completely revolutionized it. So there is a – I think it's – I think you've got to kind of separate the people that are very much keen for just trading to happen. and Matt Levine makes this point in today's newsletter as well, in money stuff, that there's a lot of people who are incentivized just to have loads and loads of trading happening, and they don't really care what happens to it.

5:47I think it can have a big impact. I think it's easy to overstate what AI does. But I think ultimately one of the big changes could actually be the business model. Because ultimately the payment for order flow, which is this idea that you can get commission-free trading, and market makers are happy to get that. The more sophisticated that these retail traders become, the worse a business proposition it becomes to trade against them. And that could actually change the economics of some of the payment for order flow models. I'm laughing when you mentioned payment for order flow because it was just, what, five years ago at this point that we were talking about payment for order flow every single day.

6:19And it was seen as a really pretty controversial way for us to be able to do free trades and I say us as retail participants. Okay, so I want to talk, what were you going to say? Just one thing, though. Like if Wall Street's always eight steps ahead or whatever it is. Yeah, I don't think Jane Street is doing this. So does it mean that the retail investor, yeah, may have some fun and do well, but there's always, they're still ahead. Like, how does that impact this? Yeah, I think it's a great question. I would say that there are definitely situations where Main Street is catching up with Wall Street.

6:58But ultimately, when it comes to market making, when it comes to the kind of stuff that Jane Street does and Citadel Securities and those kind of firms. Yeah, Hudson River Trading. In the equity market, yes, those firms are many multiple steps ahead. And they're the main counterparty to retail in prediction markets as well now, in terms of Susquehanna as one of the big counterparties, jump trading as well. So yeah, I mean, retail is facing off against very, very powerful professional firms. What I'm saying is that retail has a lot more tools in their arsenal than they used to to play this game.

7:26And maybe it's less of an unfair fight than it used to be. We're speaking with Bernard Goiter, US options reporter for Bloomberg News. He joins us here on set in New York. Bernard, I'm wondering about, and my question will show that I am not a vibe coder, but one question that I've had about these. He wants to be. He's trying to be. I'll get there one day. Anyway, if retailers or retail participants rather are using the same tools to create agents to do this work on behalf of them, does that mean that they're sort of making the same trades as each other? And there's going to be like less of an opportunity for them to sort of find something that's unique to what they actually believe.

8:14Does that make sense? Yes, it does. So there is this question of crowding. Are people going to make a lot of the same decisions? And funnily enough, that's also something that happens on traditional markets with Wall Street. You see that with the pod shops all entering the same trades, whether that's equity dispersion trade is one example. There was very, very popular trade that lots of the hedge funds all did at the same time. You have it in the treasury market. You have it with the basis trades between treasuries and treasury futures. So it's a common problem that exists. And maybe it's going to become more so one.

8:44But I think as long as some people are bullish and some people are bearish, then there should be enough kind of mix in there. It's sort of the same argument that people use about investing in index funds, right? Are there going to be too many index funds investors? Then you won't actually see the daily movements. We have not seen that play out, and we still have pretty big daily movements in individual stocks. Yeah, absolutely. Like, I think, you know, all right, so this is the way everything's going. I just think about, like, so what happens in a crisis? Like, do we? One issue is that some of the model sets that people are using, they don't go back that far.

9:18So if you're trading zero-day options, that's only really been an asset class that people have been trading in and out of since 2022. That hasn't really seen a proper bear market yet. So you could have a situation a bit like the run-up to 2008 housing crisis, where none of the models were trained in a scenario where house prices go down. In the same way, none of these models are necessarily trained in a scenario where share prices fall significantly and then stay there. So that's definitely a concern for people. But people often kind of are interrogating these models and asking the right question.

9:52But you've got to sometimes… You've got to push it, don't you? You've got to push it to be like, hey, did you think of this kind of thing? Right. That's interesting. I would imagine… I would have thought that the models would be tested or they're getting there. Well, it depends what data set it's being trained on. And it depends on what questions you ask it. But you as a human ultimately have to be the one that interrogates it. You have a human. As a human, you have to say, okay, what happens if there's a 2008-style crisis on this kind of model portfolio or on this trading system? So ultimately, a lot of it still goes back to the decisions being made by the individual.

10:27But instead of it being a human kind of picking specific trade, it's more about designing a model. So your job becomes a lot more like a quant at a hedge fund and much less like an individual punter kind of throwing darts at a dartboard. Just very briefly, you got to see how these models work in the real world and how these agents work in the real world. How much further does it go in the next couple of years? I think I was very surprised by how sophisticated these trading tools have become. And I think it will go a lot further. I think it's going to become a lot more mainstream, partly because one of the downsides of trading is that it's very labor-intensive and actually quite boring.

11:08Just sitting there being like, oh, it's hit the Bollinger Band. That's not that fun for most people, unless you're kind of a strange person. But I like the idea if I can... You're all strange here. Yeah, but apart from, I'm sure, a cohort of our listeners, that's not actually that exciting. Whereas if you can get a lot of that boring stuff being done for you by an AI, and it makes money in a safe way, yeah, I think it's going to become super popular. You can go out and go for a walk. Well, what do you do, right? Go for a walk. Yeah, you go and engage with the real world. Touch grass, as they say.

11:39Go and watch the Odyssey. Bernard Goiter, U.S. Options reporter for Bloomberg News.

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