Market manipulation is an old problem. People try to make money off unsuspecting investors by artificially influencing the stock price. But what about the fact that markets are not manipulated by humans?
MARY LOUISE KELLY, HOST:
As long as financial markets exist, market manipulation exists. But what if the people manipulating the market aren't people at all? Indicators by Adrian Ma and Weilin Wong reveal how AI could disrupt financial markets.
ADRIAN MA, BYLINE: There are many ways AI can be used to manipulate financial markets, but to help us understand it, we're going to break them down into two main categories. The first is what you might call human-led manipulation.
WEILIN WONG, BYLINE: And to help us explain, we called Nicol Turner Lee. She is the director of the Center for Technology Innovation at the Brookings Institution. In her research, Nicole outlined ways in which AI can be used to intervene in markets. The biggest one is the spread of misinformation.
NICOLE TURNER LEE: We see it every day in the analog world: the president makes tariff announcements, the market goes haywire. When you have something embedded in a technical system, what's even scary in this area is that you may not know where it's coming from.
WONG: Generative AI makes it very easy for attackers to create disinformation. With a few keystrokes, anyone can create a fake news article or deepfake recording. And with the help of bots, they can easily spread misinformation online.
MA: What if AI could be used to manipulate markets? What? What we're talking about here is that AI-powered trading bots are out of control. Of course, trading bots are not such a new thing. For years, hedge funds have used them to conduct high-frequency trading. But as finance professor Ekaterina Svetlova says, these bots still require a lot of human input to tell them how to trade.
EKATERINA SVETLOVA: In the case of high-frequency trading, you gave the machine clear rules of what to do. And now we have algorithms that don't get clear rules from people.
WONG: At the University of Twente in the Netherlands, Ekaterina studies how technology is shaping financial markets, and says these new algorithms have led to a more intelligent kind of trading bots based on artificial intelligence machine learning. In particular, the so-called reinforcement learning. This is where the AI agent is given a goal, such as maximizing long-term profit, and without any further guidance from the human, the AI gets to work.
MA: Researchers at the University of Pennsylvania ran a simulation to see what would happen if they released a group of AI trading bots using reinforcement learning into the market. And what they discovered was that instead of trading against each other, as you would expect in a competitive market, these bots began colluding with each other to manipulate the market. And what's crazy about this is that if people engage in this kind of collusion and manipulation in the financial markets, they will be breaking the law. But the crime of collusion and market manipulation has historically required human intent.
WONG: So who will be held responsible if a gang of trading bots starts committing financial crimes? Nicol Turner Lee of the Brookings Institution says it's a legal gray area and regulations are likely needed to correct it. Like all the experts we spoke to, Nichol says AI isn't inherently bad for financial markets. It can be used, for example, as a fraud detection tool.
MA: But because regulators are still playing catch-up, this means that most of the power is in the hands of financial companies that are experimenting with these artificial intelligences and are still discovering what they can do.
WONG: Weilin Wong.
Massachusetts: Adrian Ma, NPR News.
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