Cybernetic Market Manipulation

As financial markets become ever more driven by information technology and artificial intelligence, they also become more susceptible to new methods of market manipulation.  With these new methods of manipulation, millions of dollars can disappear in minutes, a handful of individuals can fundamentally disrupt billion dollar financial operations, a rogue actor can halt the trading of Fortune 500 companies, and trillion-dollar financial markets can be manipulated with a simple click or a few lines of code.

In my recent article, The New Market Manipulation, I examine these emerging high-tech methods of market manipulation, and the need for greater awareness and pragmatic answers to address the rising technological threats to manipulate our financial markets.  In the article, I termed these new modes of market manipulation as cybernetic market manipulation because they generally use the electronic communications, information systems, and algorithmic platforms of the new, high-tech financial marketplace to unfairly distort information and prices relating to financial instruments or transactions. At its core, cybernetic market manipulation corrupts how humans and machines communicate between and amongst each other in the financial markets. In practice, cybernetic market manipulation can manifest itself in the use of new financial technology to carry out old illicit schemes, as well as the use of new financial technology to carry out new illicit schemes. While cybernetic market manipulation frequently shares the same illicit goals as its traditional human-driven counterparts, it can be much more impactful because of the modern financial markets’ unprecedented value, interconnectedness, and reliance on technological systems.

Cybernetic market manipulation schemes like pinging, spoofing, electronic front running, and mass misinformation are largely made possible by the rise of autonomous, high-speed supercomputers running on smart algorithms and artificial intelligence.  With mass misinformation schemes, for instance, bad actors can now leverage new financial and information technology to quickly disrupt and distort financial markets for their own gains on an unprecedented scale by disseminating bad data, fake news, and fictitious filings into a high-tech marketplace that thrives on accurate data and information. Because today’s financial markets are so reliant on interconnected information systems, distortions and errors in one source of information can have large cascading effects on the greater marketplace in the short term, and confidence-jarring effects on the greater marketplace in the long term.

Policymakers and regulators will face serious structural obstacles in confronting the threats posed by cybernetic market manipulation.  In particular, they will likely face ill-suited laws designed in a different era, resource asymmetries relative to those possessed by private actors, and other obstacles of detection and enforcement. 

Nevertheless, near-term actions and principles can be adopted to confront the looming threats of cybernetic market manipulation.  In the article, I highlight three areas and action items for the near term: (1) enhance the integrity of financial intermediaries, (2) improve financial cybersecurity, and (3) safeguard the investments of ordinary investors.  First, private financial intermediaries must serve as stronger guardians against market manipulation because attempts at manipulation frequently happen at the intermediary level, and not at the market level since the financial market is truly a market of intermediaries.  Second, greater and more urgent emphasis should be placed on financial cybersecurity, since the new methods of manipulation frequently leverage cyber means for devious ends.  Policymakers should provide more incentives for private actors to vigilantly upgrade their cybersecurity capabilities.  Third, ordinary investors should be encouraged to adopt a boring, low-cost, low speed investment strategy in the new high-tech, high-speed financial marketplace filled with the perils of cybernetic market manipulation to maximize their long-term returns. 

In sum, cybernetic market manipulation will present some of the most complex and consequential challenges for policymakers, regulators, financial businesses, and investors in the coming years.  While clear long-term solutions remain elusive, certain mitigating near-term steps can be taken to safeguard the interests and integrity of our financial markets against the threats of cybernetic market manipulation. 

Tom C.W. Lin is a Professor of Law at Temple University Beasley School of Law.