LO 9.1.7.C

Learning Objective: Describe how financial institutions’ uses of artificial intelligence and machine learning could be sources of greater instability and vulnerability in financial markets.

Review

• Sources of greater instability and vulnerability

Trade transactions based on AI and ML applications, such as high frequency trading (HFT), might amplify market volatility and become a new source of vulnerability for the markets.

The efficiency of AI and ML applications drives the progressive thinning of capital margins and liquidity buffers. Such a margin/buffer reduction in turn exposes markets to systematic risk and becomes a new source of markets’ instability.