Artificial intelligence has taken on numerous challenges over the past year, and now it is making its way to Wall Street to tackle the “bad guys”, the dreaded market cheats. 

The news was revealed by two exchange operators who are planning to apply artificial intelligence tools to perform market surveillance in the coming months, and according to a Wall Street regulator, they are not far behind, Reuters reports.

The intentions of the use of the software is to for instance search through chat-room messages to detect any “bragging or back slapping” around the time of the launch of a big trade. It will also be able to unravel complex issues more efficiently, such as incidents called “layering” where orders are rapidly sent to exchanges to then get cancelled in order to artificially move a stock price.

Tom Gira, executive vice president for market regulation at the Financial Industry Regulatory Authority (FINRA) believes that AI might even have the ability to detect new types of cicanery. 

“The biggest concern we have is that there is some manipulative scheme that we are not even aware of,” he told Reuters. “It seems like these tools have the potential to give us a better window into the market for those types of scenarios.”

FINRA plans to test artificial intelligence software being developed in-house for surveillance next year, while Nasdaq Inc (NDAQ.O) and the London Stock Exchange Group (LSE.L) expect to use it by the end of the year, Reuters reports. The technology will not only be limited to the stock markets, as the exchange operators are planning to sell it to banks and fund managers, to enable them to monitor their traders.

Financial firms are not new to applying artificial intelligence software, but it is only now that it has started becoming beneficial for market oversight. “We haven’t really let the machines loose, as it were, on the surveillance side,” Bill Nosal, a Nasdaq business development executive who is overseeing its artificial intelligence effort told Reuters.

The way that market surveillance works is that it generally relies on algorithms in order to detect patterns in trading data that potentially signal manipulation, where it then urges staff to investigate. FINRA monitors the impressive amount of 50 billion market “events” daily, covering anything from stock orders, modifications, cancellations and trades.

However, it will not tell you the amount of events that are flagged, or the number of those who yield evidence of misbehaviour. The machine learning software now being developed will be able to look beyond these patterns and understand the situations that truly warrant “red flags”, Gira said.

FINRA is scheduled to get tested next year, alongside its already existing systems to create a comparison of the two.

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