Regulated Exchanges and AI: What’s Behind the Hype

April 16, 2024

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The topic of AI has been the subject of a number of panels at recent industry events attended by Exberry. We thought it would be helpful to provide a snapshot of some of the leading thinking on AI, particularly how it is predicted to affect regulated exchanges.

The potential revolutionary impact of AI is the number one consideration. Actionable intelligence from massive datasets can finally be unlocked. Productivity through the automation of manual workflows can be improved, providing more effective risk management and combating cybercrime. 

While the opportunities are huge, we also have to recognise that AI is simply a technological tool which can be used for both good and bad. We need to be careful, for example, that this technology won’t hamper the smooth functioning and integrity of markets. Sophisticated GenAI deep fakes pose a serious concern, and regulators need to step up and start introducing rules that put safeguards around this. We also need to remember that while some of the most popular GenAIs are open-sourced and currently provided for free, this might not always be the case. Similar to other large technology providers, exchanges should be aware of vendor lock-in. 

In the meantime, a handful of the larger exchanges have been in pursuit of AI use cases for the past few years. Financial crime capabilities are a common one, whereas others are looking into introducing innovations such as settlement prediction or maximising fill rates of orders at a particular time. 

Notwithstanding the issues around cybercrime and potential system market risk, there is a general feeling that GenAI will fundamentally alter methods of trading. It might still be in the very early stages, but it could stand to have a lasting impact in the industry. 

Next-Gen Consultancy for Financial Markets

Ambitious financial exchanges need to keep growing. Yet in the world of capital markets this is not always a straightforward task. Each jurisdiction has its own national characteristics and different way of doing things. If an exchange decides to build its own trading or clearing infrastructure, unless it is happy paying an exorbitant cost, it will typically have to wait a number of years for delivery. So, what are the alternatives for exchanges?

Exchanges pivotal for EU’s Capital Markets Union

The EU’s Capital Markets Union (CMU) is receiving strong backing, with widespread enthusiasm evident among stakeholders who are optimistic about its successful rollout. A significant concern has been the persistent lack of on-screen liquidity in European markets, dominated as they are by over-the-counter (OTC) trading. This contrasts sharply with the US where, according to the European Central Bank (ECB), 75% of corporate financing is conducted through capital markets, compared to Europe’s reliance on traditional bank loans.

All Markets Rise: Maximising Exchange Profit by Modernising Across All Sectors

Imagine a scenario in which a large, successful financial exchange is making profits across all its markets alike, from equities, fixed income and derivatives, to commodities and FX. Yet, sadly, this vision is far from reality. Oftentimes smaller and less liquid markets, such as for fixed income and derivatives, find it difficult to obtain the modernisation of infrastructure they need, even when it is just a simple feature request.

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