How Artificial Intelligence Triggered The Stock Market Plunge

Experts are warning that artificial intelligence (AI) may trigger the next stock market or financial crash – especially in light of Monday’s freefall that was triggered in part by computers.

The financial industry’s rush to replace human traders with AI can intensify market shocks and make crashes worse, a panel of financial experts said.

“Taken as a group, universal banks’ vulnerability to systemic shocks may grow if they increasingly depend on similar algorithms or data streams,” a November 1 report from the Financial Stability Board (FSB) warned. The FSB is a group of experts that advises central banks like the Federal Reserve and the Bank of England on risks.

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The FSB is worried about next-generation trading technologies that use advanced software algorithms based on AI and machine learning to make financial decisions, Bloomberg Markets reported.

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“These risks may become more important in the future if AI and machine learning are used for ‘mission-critical’ applications of financial institutions,” the FSB warned. “Moreover, advanced optimization techniques and predictable patterns in the behavior of automated trading strategies could be used by insiders or by cyber-criminals to manipulate market prices.”

On Monday the Dow Jones plunged 800 points in about 10 minutes. It ended the day down 1,175 points.

“The explosive speed of the fall … that is done by machines,” Tom Stevenson of Investment Director at Fidelity Personal Investing told the BBC.

A major fear is that AI might start making trades so fast that humans will be unable to keep up with the process. Another is that hackers or terrorists would be able to sabotage the markets.

Artificial intelligence is closer to taking over the financial industry than many people believe. The world’s first hedge fund run by artificial intelligence, Numerai, went online last year.

Since then, at least two other efforts to create AI hedge funds, Sharpe Capital and Algo Marketplace, have been proposed.

“If computing power and data generation keep growing at the current rate, then machine learning could be involved in 99 percent of investment management in 25 years,” Luke Ellis of the British investment firm Man Group Plc told Bloomberg.

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