By Alessio Azzutti, University of Hamburg
Technological innovation, such as advancements in Artificial Intelligence (AI) within the ramification of algorithmic trading, has been shaping the organisation and operation of global capital markets. Whereas AI can contribute to more efficient markets, concerns are growing about its potential to undermine fair and orderly trading. Specifically, powered by Machine Learning (ML), increasingly autonomous, capable and sometimes black-box trading systems can expose markets to unprecedented risks of rampant and subtle forms of market manipulation that are difficult to detect and prosecute. By contrast, technological innovation can also assist financial regulators in mitigating some of these risks. In particular, market conduct supervisors can benefit from an incremental use of supervisory technology (SupTech), such as AI-based surveillance systems and tools, to enhance their ability to cope with algorithmic market manipulation. Therefore, in envisioning a paradigm shift in market conduct supervision towards an increased reliance on AI/ML methods and techniques, this chapter examines ongoing technological trends and addresses some of the legal and institutional challenges that EU policymakers and regulators will have to face to safeguard public confidence in the integrity of EU capital markets.