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

ILE Working Paper Series, No. 54 (This version) Computer Law & Security Review Volume 45, July 2022, 105690 (Published version not available here)

32 Pages Posted: 9 Feb 2022 Last revised: 12 Aug 2022

See all articles by Alessio Azzutti

Alessio Azzutti

Institute of Law & Economics - University of Hamburg; National University of Singapore (NUS) - Centre for Banking and Finance Law (CBFL); European Banking Institute

Date Written: January 2022

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. A growing number of investment firms have been adopting AI, and particularly ‘Machine Learning’ (ML) methods, within the ramification of algorithmic trading. While AI/ML trading is expected to deliver several efficiency gains for capital markets, it also brings unprecedented risks for their safety and integrity due to some of its technical specificities and related additional uncertainties. 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’, as a normative framework, can allow us to think of innovative solutions to fix the many shortcomings of the 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 regime 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

JEL Classification: G18, G28, G38, K14, K22, K42, O33, O38

Suggested Citation

Azzutti, Alessio, AI-driven Market Manipulation and Limits of the EU law enforcement regime to credible deterrence (January 2022). ILE Working Paper Series, No. 54 (This version) Computer Law & Security Review Volume 45, July 2022, 105690 (Published version not available here), Available at SSRN: https://ssrn.com/abstract=4026468 or http://dx.doi.org/10.2139/ssrn.4026468

Alessio Azzutti (Contact Author)

Institute of Law & Economics - University of Hamburg ( email )

Johnsallee 35
Hamburg, 20148
Germany

National University of Singapore (NUS) - Centre for Banking and Finance Law (CBFL) ( email )

Singapore

HOME PAGE: http://https://law.nus.edu.sg/cbfl/people/alessio-azzutti/

European Banking Institute ( email )

Frankfurt
Germany

HOME PAGE: http://ebi-europa.eu/

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