AI-driven Market Manipulation and Limits of the EU law enforcement regime to credible deterrence

Alessio Azzutti ()

No 54, ILE Working Paper Series from University of Hamburg, Institute of Law and Economics

Abstract: As in many other sectors of EU economies, 'artificial intelligence' (AI) has entered the scene of the financial services industry as a game-changer. Trading on capital markets is undoubtedly one of the most promising AI application domains. A growing number of financial market players have in fact been adopting AI tools within the ramification of algorithmic trading. While AI trading is expected to deliver several efficiency gains, it can also bring unprecedented risks due to the technical specificities and related additional uncertainties of specific 'machine learning' methods. With a focus on new and emerging risks of AI-driven market manipulation, this study critically assesses the ability of the EU anti-manipulation law and enforcement regime to achieve credible deterrence. It argues that AI trading is currently left operating within a (quasi-)lawless market environment with the ultimate risk of jeopardising EU capital markets' integrity and stability. It shows how 'deterrence theory' can serve as a normative framework to think of innovative solutions for fixing the many shortcomings of the current EU legal framework in the fight against AI-driven market manipulation. In concluding, this study suggests improving the existing EU anti-manipulation law and enforcement with a number of policy proposals. Namely, (i) an improved, 'harm-centric' definition of manipulation; (ii) an improved, 'multi-layered' liability regime for AI-driven manipulation; and (iii) a novel, 'hybrid' public-private enforcement institutional architecture through the introduction of market manipulation 'bounty-hunters'.

Keywords: algorithmic trading; artificial intelligence; market manipulation; market integrity; effective enforcement; credible deterrence (search for similar items in EconPapers)
JEL-codes: G18 G28 G38 K14 K22 K42 O33 O38 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-cmp, nep-law and nep-reg
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/249336/1/ile-wp-2022-54.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:ilewps:54

Access Statistics for this paper

More papers in ILE Working Paper Series from University of Hamburg, Institute of Law and Economics Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().