Artificial Intelligence in Financial Markets: Addressing Systemic Risk and Market Abuse

The rise of advanced artificial intelligence (AI) in financial markets, especially using reinforcement learning and deep learning methods, has sparked worries among regulators. While there’s no definitive proof of these AI techniques being widely used in trading systems yet, authorities are cautioning that their future implementation might escalate systemic risks and introduce new types of market manipulation. This discussion looks at how advanced AI systems could shake up the market’s stability and the hurdles they pose for existing market abuse detection and prevention structures.

Let’s delve into whether AI poses a risk for financial markets and how regulators are staying alert to potential abuse. Although AI hasn’t made a significant impact in trading systems so far, the potential for its integration is creating a buzz among watchdogs. They fear that once these advanced AI models come into play, they could throw markets into chaos and open doors to innovative forms of market exploitation.

The unique characteristics of AI systems have the potential to reshape financial markets, complicating the current strategies used to detect and prevent market abuse. As researchers continue exploring the implications of integrating AI into trading systems, regulators are bracing themselves for the challenges ahead. What’s certain is that the coming years will be crucial in determining how AI will shape the financial landscape.

This informative piece was originally featured in the December 2024 edition of Butterworths Journal of International Banking and Financial Law.