Securities and Exchange Commission Chair Gary Gensler spoke at the 2023 Securities Enforcement Forum in Washington, D.C. on October 25 and had some intriguing things to say about the impact artificial intelligence may have on the financial markets – good and bad.
On the upside, Gensler touched upon the potential transformative power of AI.
“Predictive data analytics and AI are already changing the face of finance,” he told the DC audience. “It’s going to lead to greater efficiency,” Gensler added “(and) it will transform our economy as big as, you know, the automobile revolution in the 1920s.”
Yet Gensler also issued a candid warning about the financial markets and AI, especially “predictive analytics”. Over the next decade, transactional financial data held in the hands of too few AI investment platforms could result in a “narrow market” outlook by regulators and by major market players,” he said.
That’s a problem, as a significantly singular outlook on financial markets using predictive AI models could conceivably trigger (or accelerate) a major financial crisis.
“Even the biggest financial firms will be relying on some aggregated data pool or some foundation model somewhere,” Gensler said at the forum, as reported by CFO Dive. “The dependence on a single AI platform for mortgage or other data will prompt destabilizing “herding and network interconnectedness,” he noted.
With “Concentrated” AI Finance Models, Regulators May Miss the Big Picture
The problem is actually in-house at the SEC, as agency reviewers are more accustomed to investigating actual financial services companies and not so-called “co-dependencies” as Gensler stated.
In doing so, SEC regulators may focus on the singular power of just a handful of AI-fueled portfolio investment platforms that could dominate the landscape and throw regulators off the scent of other investment platforms that could be driving markets downward.
As Gensler put it, “Regulators may conclude “that everybody (including regulators) was relying on the same model.”
If artificial intelligence winds up “leading to concentrated nodes in the financial system,” he said. That could put too much power in the hands of “no more than four AI finance platforms”, according to CFO Dive, which would vastly supersede the power of the leading cloud computing systems today.
Predictive data analytics have “remarkable abilities to predict things,” Gensler concluded. “I do think that there’s a risk that the crisis of 2027 or the crisis of 2034 is going to be embedded somewhere in predictive data analytics.”
Earlier this year, at the MIT AI Policy Forum, Gensler indicated the SEC wouldn’t likely implement any “AI specific” rules, despite his misgivings about AI-driven predictive analytics and concentrated investment model outlooks.
“We generally don’t write new laws or regulations,” he noted. “We’ve come to some consensus (on financial market oversight) through our legislative bodies, and we’ve adopted laws to protect the public” across investor protection and financial stability.
Brian O’Connell, a former Wall Street bond trader and best-selling author, is a prominent figure in the finance industry. With a substantial background as an ex-Wall Street trader, he has authored two best-selling books: ‘The 401k Millionaire’ and ‘CNBC’s Creating Wealth’, demonstrating his profound knowledge of finance and investing.
Brian is also a finance and business writer for esteemed national platforms and publications, including CNN, TheStreet.com, CBS News, The Wall Street Journal, U.S. News & World Report, Forbes, and Fox News.
