Finance and tech experts alike are raising red flags. They’re worried about the fast-moving evolution of AI trading bots. With improvements in technology, these bots have the potential to become dangerous to market integrity and financial systems. Funding emerging models and support The emergence of AI-driven disinformation narratives on social media is a game changer. Regulators will have difficulty monitoring these new channels for market manipulation.
Alessio Azzutti, co-author of the paper — these are dangerous technologies. He adds, many of those scenarios are still speculative as we don’t have the real-world proof yet. Nevertheless, the contentious conversations that have continued around these mom-and-pop-style developments underscore the urgency for the regulatory environment to catch up.
The Role of AI in Market Manipulation
The GameStop saga is a colorful and astonishing example of the influence of coordinated trading. This herd trading can cause huge disturbances in financial markets. When users on a Wall Street Bets forum on Reddit decided to collectively buy a lot of GameStop stock, they caused the price to skyrocket. Filippo Annunziata is an associate professor of financial markets and banking legislation at Bocconi University. He likens today’s regulatory landscape to the tale of “the tortoise and the hare.”
“It’s a bit like the tortoise and the hare,” – Filippo Annunziata
In this analogy, he explains that supervisors are akin to tortoises, slow and methodical, while algorithmic manipulators operate at lightning speed, making it difficult for regulatory bodies to catch up. The discrepancy between technological development and regulatory pace has brought a pointed focus on the effectiveness of existing regulation. These are the Regulation on Market Abuse (MAR) and the Markets in Financial Instruments Directive II (MiFID II). Annunziata thinks that the current EU rules should be left exactly as they are. Instead, they have to be reshaped to address the brand-new challenges that AI poses.
Azzutti is equally convinced that malicious actors take advantage of human behavior to mislead the market. In addition, they use AI bots to supercharge their tactics. He also stresses how these actors are able to construct complex narratives that are tailored to manipulate retail investors across active social media platforms.
“Malicious actors… can be very active on social media platforms and messaging platforms such as Telegram, where they may encourage members to invest their money in DeFi or in a given crypto asset, to suit themselves,” – Alessio Azzutti
The Challenge of Regulation
AI bots work hand-in-hand to amplify and disseminate these targeted narratives. This creates deep challenges for regulators attempting to follow the web of coordination between these actors. Itay Goldstein, one of the researchers, explains that old-school ways of spotting collusion just won’t work on AI that acts on its own without direct talks.
“They’re not sending emails, they’re not meeting with each other. They just learn over time the best strategy and so the traditional way to detect collusion doesn’t work with AI,” – Itay Goldstein
This lack of transparency makes an already confusing regulatory environment even more challenging. Accordingly, experts are calling for creative solutions to address the differentiated complexities that AI-powered trading presents. As Goldstein testifies, regulation needs to adapt in order to effectively address these new threats.
“Regulation has to step up and find new strategies to deal with that,” – Itay Goldstein
Both Azzutti and Goldstein emphasize that the proliferation of AI bots can lead to misinformation campaigns that “pollute chats through fake news to mislead retail investors.” In many ways, these tactics underscore a fundamental danger for regulators. To do this, they need to design tools that truly mitigate the dangers associated with AI-generated misinformation.
The Future of AI in Trading
As AI trading bots become more sophisticated, investor confidence could shift in dangerous ways and market dynamics would fundamentally change. Annunziata suggests one possible approach to mitigate potential risks:
“I even suggest that we ask people who develop AI tools for trading on markets and so on to include circuit breakers in these AI tools. This would force it to stop even before the risk of manipulation occurs,” – Filippo Annunziata
Regulators are actively addressing the impact of AI on trading. Their goal is noble — protect market integrity while fostering innovation. Striking the right balance between fostering technological advancement and ensuring investor protection will be key in determining how our capital markets evolve.
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