AI-Driven Innovations in Financial Technology: A Review of Algorithmic Trading and Risk Management

Abstract

The rapid advancement of artificial intelligence (AI) has significantly transformed the financial technology (FinTech) sector, particularly in algorithmic trading and risk management. AI-driven solutions leverage machine learning, deep learning, and natural language processing (NLP) to analyze vast amounts of financial data, detect patterns, and make high-frequency trading decisions with precision. The application of AI in algorithmic trading has led to improved efficiency, reduced transaction costs, and enhanced market liquidity. Additionally, AI-based risk management techniques have strengthened financial institutions’ ability to assess creditworthiness, predict potential defaults, and detect fraudulent activities in real time Despite these advancements, several challenges persist in AI-driven FinTech applications, including data security concerns, regulatory compliance, and ethical implications. The lack of transparency and interpretability of AI models raises concerns regarding accountability and fairness in financial decision-making. Furthermore, the integration of AI with financial markets poses risks of market instability and algorithmic biases, necessitating stringent regulatory oversight. Addressing these challenges requires the development of robust frameworks that balance AI innovation with financial security and consumer protection. This paper provides a comprehensive review of AI-driven innovations in algorithmic trading and risk management, examining key methodologies, challenges, and future directions. By analyzing current trends and emerging technologies such as explainable AI, quantum computing, and blockchain integration, this study offers valuable insights into the evolving landscape of AI applications in FinTech. The findings highlight the potential of AI to revolutionize financial markets while emphasizing the need for ethical AI governance and regulatory adaptability to ensure sustainable and responsible growth in the sector.