The US Securities and Exchange Commission (SEC) has raised concerns about the impact of generative AI on financial markets.
In a speech Delivered to the National Press Club on Monday, SEC Chairman Gary Gensler said that recent advances in generative AI increase the likelihood that institutions will rely on the same subset of information to make decisions.
Gensler said the huge demand for data and computing power could mean that only a few technology platforms can dominate the field, narrowing the field of AI models that companies can use. If a model provides inaccurate or irrelevant information, financial institutions can end up using the same faulty data and making the same bad decisions, creating the risk of something like the 2008 financial crisis, where banks played “follow the leader” based on of credit information. raters, or the Twitter-fueled run on Silicon Valley Bank. Gensler likened the potential fallout to something like the 2008 crisis, which he said demonstrated the risks of a “centralized data set or model” in finance.
“AI can increase financial fragility, as it could promote herding with individual actors making similar decisions because they receive the same signal from a base model or data aggregator,” Gensler said. He added that the rise of generative AI and other deep learning models “could exacerbate the inherent networking of the global financial system.”
The financial sector has long been using AI systems. Some insurance companies and creditors implement algorithms and natural language processing to analyze financial data before deciding on loan amounts. Trading companies have relied on AI to verify fraud and market signals much faster than humans looking at a computer screen.
Here, Gensler focused on large language models, calling generative AI and LLMs “the most transformative technology of our time.” His speech has sometimes conflated this with the more general category of artificial intelligence technology, although not all of these systems present the same risks and questions. Gensler also noted that generative AI is not yet widely used in finance.
This is not the first time that Gensler has sounded the alarm about the impact of AI on financial markets. While still at MIT, Gensler and co-author Lily Bailey wrote a paper explore how current regulatory structures are unable to address the issues that arise from the use of AI in finance.
AI regulation is also not a new topic for the SEC. The agency established FinHub, a resource center created to answer questions about artificial intelligence, cryptography and other financial technology-related issues, in 2018. It has actively pursued cases against emerging technology companies it believes have violated the law, especially in the cryptography. space.
The SEC itself also uses machine learning to help market surveillance enforce its policies.
Gensler said current guidelines on risk management need to be updated to keep up with powerful new technology, but noted that the entire financial industry may need to rethink how to use it.