The era of generative AI: Driving transformation in capital markets

It’s the dawn of a new era in capital markets. The excitement from our industry ecosystem is almost palpable, unlike any other response to new and emerging technologies that we have witnessed in the last couple of decades. And it’s not as though capital markets firms are unfamiliar with AI. Traditional AI—that is, what we’re now calling AI-based solutions before the arrival of generative AI—has seen sophisticated adoption across the industry value chain for several years. But the new era of generative AI is different, and the promise is huge, primarily due to the perceived potential of generation, as the name suggests.

In this blog—the third in a series following Bill Borden’s post on generative AI in banking and Sasha Sanyal’s perspective for insurance—I’d like to share our perspectives on generative AI garnered from our work with capital markets clients in recent months as they seek answers to essential questions, such as: What are the benefits and key use cases? What are the current constraints? Are my firm and my data protected? How do I even get started?

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The promise of generative AI across the capital markets value chain

We are still in the early days, but the momentum across the board has been fascinating. A recent report by McKinsey illustrates that the technology could deliver value equal to an additional USD200 billion to USD340 billion annually if the use cases are fully implemented within the banking industry. There is also potential for double-digit percentage efficiency gains as it gets to deployment and scale for certain scenarios.¹

Just in the last few weeks there have been several news articles covering innovative examples of firms prioritizing AI to support internal and client objectives, such as: JP Morgan for trading signals (Interesting Engineering); Goldman Sachs for powering insights (Wall Street Journal); Morgan Stanley for unlocking the knowledge base for wealth management (OpenAI.com); and State Street for its potential to revolutionize the firm (Forbes). A news report from Bloomberg (courtesyWealth Management) lists several other examples of Wall Street firms that are considering using AI to rewire the world of finance.

A recent survey by KPMG highlighted that, across industries, more than three-quarters of executives (77 percent) see generative AI as by far the most impactful emerging technology they will use, and 71 percent plan to implement their first generative AI solution within two years. And more than three-quarters of financial services executives see opportunities to power fraud detection, risk management, and client experiences.²

The art of the possible for generative AI in capital markets

Consider, for example, a typical “day-in-the-life” for key roles in a global markets firm, depicted as follows:

The era of generative AI: Driving transformation in capital markets - Microsoft Industry Blogs (2)

Starting with the front office, at the genesis of the trade, content generation can be employed to draft pitchbooks and facilitate credit reviews. Semantic search can help clients and representatives find better and more accurate insights from vast amounts of research data. And summarization techniques can instantly produce highly accurate reports of client interactions, augmented with sentiment analysis and signal intelligence—all of which can be instrumental in building strategies that address client, portfolio, and internal parameters.
Through trade support and intraday book management in the middle office, early detection of exceptions can reduce negative impacts and false positives; trade notifications can be optimized; and firms can implement enhanced position monitoring, outlining regulatory impacts and analyzing investment valuations or environmental, social, and governance (ESG) factors.
Finally, in the back office and executive functions, firms can benefit from enhanced reporting to improve decision-making through increased speed and relevance both internally (to adjust strategy and for remediation) and externally (to improve client experience and regulatory reporting).

Driving AI innovation with solutions from Microsoft

To light up scenarios such as these for their businesses, many capital markets firms are exploring the compelling capabilities of Microsoft offerings such as Microsoft 365 Copilot and Microsoft Azure OpenAI Service, which combines advanced foundational models from OpenAI with the enterprise capabilities of Azure. Helping them build powerful new generative AI solutions, such as customized copilots and chatbots, is Azure AI Studio, a new Azure OpenAI capability announced recently. Azure AI Studio makes it easier to create AI models using a company’s own private data while maintaining control, compliance, privacy, and security. What’s more, to protect their data, firms can rely on the enterprise-grade security of the Microsoft Cloud, as well as capabilities such as those provided by Microsoft Purview for robust information protection, governance, and compliance—critical capabilities for our clients, who are operating in the most regulated markets.

Responsible AI by design: Helping capital markets firms adopt generative AI

As next-generation AI innovation gains momentum, we are optimistic about what it can do for people, industry, and society. Microsoft advancements in AI are grounded in our company mission to help every person and organization on the planet to achieve more. We’re committed to making the promise of AI real—and doing it responsibly. Our approach to AI is based on three principles: meaningful innovation, empowering people and organizations, and responsibility.

Accordingly, we’re dedicated to the responsible development of AI systems for the industry, ensuring they will function as intended and be used in ways that earn trust. We were one of the first major technology companies to call for thoughtful government regulation on facial recognition technology and are committed to creating responsible AI by design through our responsible AI standard. For more information, see “What is Microsoft’s Approach to AI?”

Capital markets firms building new AI solutions with Microsoft

The value of AI is fast evolving. We are already seeing firms making noteworthy progress in early innovations on the Microsoft Cloud—such as Swift, which is building an anomaly detection model to reduce financial crime, and Morningstar, which has built a new chatbot to surface and summarize their independent insights in a conversational format for investors and investment professionals.

Also, Moody’s has just announced a set of next-generation data, analytics, research, collaboration, and risk solutions as part of a strategic partnership with Microsoft. This includes an internal copilot that incorporates Moody’s proprietary data, analytics, and research, and will be used by the firm’s 14,000 global employees.

What’s next for capital markets and AI

With generative AI, we anticipate an incredible wave of innovation in capital markets that will not only transform how firms operate but also open new markets and revenue opportunities. It will comprise elements such as the following:

Creating compelling experiences with copilots. New and existing applications will begin to incorporate generative AI with copilots likely to become indispensable to employees’ and clients’ day-to-day experiences. The copilot will be there to support them and work under their direction, with the human in charge.
Driving greater business impact with data. AI is expected to revolutionize the process of transforming data into insight and action. As a result, it promises to free employees to focus more on delivering value to their businesses and clients.
Enabling more sophisticated use cases. Plug-ins will also be key to the capital markets industry as developers and independent software vendors (ISVs) seek to provide solutions to augment large language models targeting use cases such as quantitative analysis.
Diversifying the client base and creating new revenue streams.By democratizing new ways of working with data and related services, firms can develop opportunities to deliver value-added solutions to new and mass markets.
Realizing business value compliantly.With the help of soon-to-be-available tools such as Microsoft’sResponsible AI DashboardandAzure AI Content Safety, firms will be able to build on their early trials and move to production by establishing appropriate guardrails needed to comply with internal and regulatory requirements.
Innovating with text and image inputs. As we look even farther out on the horizon, we are excited to see how capital markets firms will take advantage of new multimodal model capabilities, whereby image and text inputs drive text outputs. Being able to reason over documents with text and images, diagrams, or screenshots and return insightful text responses could yield tremendous innovation in an industry where visualizations are so prevalent in representing data, trends, facts, and forecasts.

Whatever your starting point or your ambition, our recommendation is to use a “crawl-walk-run” approach and framework, working with Microsoft and our partners—and think of generative AI as a way to deliver incremental gains from operating efficiencies to start with, evolving to more transformative plays over time.

Learn more—and join the revolution

There is much more to come, as firms across the industry continue their AI journeys and Microsoft delivers more new products and services. Watch this space in the coming months for more blog posts where I’ll share our new learning and insights.

In the meantime, to learn more about how capital markets firms can unlock business value, deepen client relationships, and manage risk with AI and the Microsoft Cloud, visit our website or get in touch with your Microsoft sales representative,

Finally, learn more about the era of generative AI across the financial services industry by reading other posts in this series: