SEC’s Gensler warns of AI threat to markets, says …


Talk of artificial intelligence has swept financial markets in recent months amid growing interest in large language models like ChatGPT, and financial regulators in Washington are paying close attention.

Securities and Exchange Commission Chair Gary Gensler is directing his staff to study the issue and recommend rule changes in light of rapid adoption of AI technology by investors, exchanges, brokers and other market participants, he said in a Monday speech before the National Press Club in Washington, D.C.

“I believe [AI] is the most transformative technology of our time, on par with the internet and mass production of automobiles,” Gensler said, according to prepared remarks.

See also: AI could further an erosion of the middle class unless Congress acts

Gensler noted that AI technology could affect the SEC’s ability to promote fairness in markets, because it could enable financial-services companies to predict and guide customer behavior through individualized product offerings and pricing.

AI could therefore reinforce “historical biases” against certain races, genders or other protected classes, he said, while the opacity of AI algorithms could make it difficult for regulators or even operators of the technology to understand discriminatory AI behavior.

“As advisers and brokers incorporate these technologies in their services, the advice and recommendations they offer … must be in the best interests of the clients and retail customers and not place their [own] interest head of investors’ interests,” Gensler said.

The SEC will be looking for ways to prevent financial companies from stealthily directing customers to products that pad their bottom line but don’t make financial sense for clients, Gensler pledged.

The SEC, for instance, is currently reviewing an application by the Nasdaq stock exchange to institute a new “dynamic” order type that uses AI to adjust order terms in real time, which it believes will improve its ability to fill client orders and reduce the impact of those orders on market prices.

Gensler is wary that AI technology could “lead to conflicts of interest” if the “AI systems are taking the interest of the platform into consideration as well as the interests of the customer.” He has therefore asked SEC staff to propose rule recommendations “regarding how best to address such potential conflicts across the range of investor interactions.”

He also expressed concern that AI tools could be used to “influence elections [or] the capital markets or spook the public” in a way that could make “Orson Welles’ 1938 ‘War of the Worlds’ radio broadcast look tame.” He was referring to a radio program that led many in the U.S. to falsely believe that a Martian invasion was taking place.

The SEC chair further warned about the impact that AI could have on financial stability, arguing that it “could promote herding, with individual actors making similar decisions because they are getting the same signal” from AI technologies, while exacerbating “the inherent network interconnectedness of the global financial system.”

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