October 3, 2023

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Redefining Vigilance

TECH TUESDAY: AI Gains Traction as a Surveillance Tool

2 min read

TECH TUESDAY is a weekly content series covering all aspects of capital markets technology. TECH TUESDAY is produced in collaboration with Nasdaq.

When top financial market regulators on both sides of the Atlantic deliver speeches about the same technology within six days of each other, that’s a strong sign that technology is an important topic. 

This is the case with generative artificial intelligence, which Financial Conduct Authority Chief Executive Nikhil Rathi addressed on July 12 and U.S. Securities and Exchange Commission Chair Gary Gensler spoke about on July 17. 

Both regulators outlined a range of challenges and opportunities presented by the emergence of generative AI. Specific to the capital markets industry, one commonality on the ‘pro’ side of the ledger is AI’s ability to improve the monitoring and surveillance of market activity, a critical function in which financial market infrastructures historically have had difficulty keeping pace with expanding trading volumes. 

“At the FCA we are determined that, with the right guardrails in place, AI can offer opportunity,” Rathi said. “The [UK] Prime Minister said he wants to make the UK the home of global AI safety regulation. We stand ready to make this a reality for financial services.”

Rathi cited several potential benefits of AI for financial services, such as improved financial models, more and better information for retail investors, and “the ability to tackle fraud and money laundering more quickly and accurately and at scale.”

Gensler called AI “the most transformative technology of our time,” and noted it’s already being used in the financial industry in compliance, trading algorithms, sentiment analysis, and other functions. 

As data continues to grow exponentially, “AI opens up tremendous opportunities,” Gensler said. “As machines take on pattern recognition, particularly when done at scale, this can create great efficiencies.” 

Rathi said the FCA itself is using AI methods to monitor portfolios and identify risk behaviors. Gensler didn’t go that far, but said the SEC “could benefit from staff making greater use of AI in their market surveillance.” 

Tony Sio, Nasdaq

Tony Sio, Head of Regulatory Strategy and Innovation with Nasdaq Anti-Financial Crime, assessed the regulatory perspective on AI, and what it may mean for market surveillance, in a July 26 TradeTalks interview.

Sio noted that the SEC’s Gensler cited fraud and insider trading as potential positive use cases for AI. One con might be explainability, for example in that brokers who are obligated to act in the best interest of their clients will have to prove AI models do that. 

Rathi of the FCA also mentioned fraud and AML as potential use cases for AI, Sio said. 

“The problem around financial crime is finding patterns of abuse among huge data sets,” Sio said. “AI, in particular the different styles and techniques that are coming across now, are incredibly suited to solve this problem.” 

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