Look Out High Frequency Trading, Watson Comes to Wall Street

Citigroup Inc. (NYSE:C) is looking to redefine what electronic banking means.  The third largest U.S. lender recently announced that is has hired International Business Machines Corp.’s (NYSE:IBM) Watson computer to advise on risks, portfolios and clients.  Citigroup is the first financial company to hire Watson for work.  Watson is an artificial intelligence computer system capable of understanding natural language and delivering precise answers.  It is most famously known for competing on Jeopardy and beating champion Ken Jennings.

IBM has already sold Watson to health care clients such as WellPoint Inc. (NYSE:WLP) to analyze client’s data, but is now looking at generating billions in new revenue by putting the computer system to work at big banks.  Last year, banks spent about $400 billion on information technology, according to International Data Corp. Financial Insights.  Bloomberg explains, “Watson the financial assistant will be delivered as a cloud-based service and earn a percentage of the additional revenue and cost savings it is able to help financial institutions realize. Watson, including its work in the health care and finance industries, will contribute ‘a portion’ of IBM’s target of $16 billion of analytics revenues in 2015.”  Some analysts expect Watson to add more than $2.5 billion in revenue in 2015, while adding more than 50 cents per share to IBM’s bottom line.

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Watson can read and understand 200 million pages of information in only three seconds.  Stephen Baker, the author The Numerati and Final Jeopardy, a Watson biography explains, “It can go through newspaper articles, documents, SEC filings, and try to make some sense out of them, put them into a context banks are interested in, like risk.”  Watson can even scan for earnings quality, breaking news and even Facebook.  Baker also says the computer gives IBM an edge against other tech giants such as Google Inc. (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT) in the field of teaching machines to comprehend text and data.

Although Watson being implemented to help make financial decisions will likely scare more small investors from a stock market already dominated by high frequency trading, Citigroup can certainly use the help.  Last year, Citigroup shares declined 44 percent, while the S&P 500 remained flat.  Shares of IBM returned 25 percent last year and recently hit a fresh all-time high just north of $200.

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To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com