Preparing Financial Regulation for the Second Machine Age The Need for Oversight of Digital Intermediaries in the Futures Markets

Abstract

Humanity is entering the Second Machine Age, in which artificially intelligent computers and software programs (artificial agents) will become involved in almost every aspect of society. Computers and software programs now drive and park cars, fly drones, compose music, sell insurance, manage investments, and even write news stories. Indeed, computers and software programs are far better––and quicker––than humans at jobs that involve looking at numbers and drawing conclusions from them, which would include jobs such as investment advisors and futures traders. The rise of automated trading systems (“ATSs”) that use high-frequency trading strategies in the futures markets is but one example of how technology is fundamentally changing the nature of the financial markets. As a result, humans who are operating as futures market intermediaries (such as commodity trading advisors or introducing brokers) are likely to be displaced by digital intermediaries, that is, artificial agents that perform critical roles related to enabling customers to access the futures and derivatives markets.

The Commodity Exchange Act (“CEA”) governs the U.S. derivatives markets and requires specified categories of intermediaries––such as commodity trading advisors (persons who are compensated to give advice about derivatives)––to register with the Commodity Futures Trading Commission (“CFTC”). Compulsory registration has been called “the kingpin” of the CEA’s “statutory machinery” because it serves to identify the persons acting as market professionals, and provides a mechanism for such persons to undergo background screenings for fitness to work in the industry, as well as proficiency testing and ethics training. Because technological advances are enabling artificial agents to perform many of the intermediary roles that previously were done by humans, Congress and the CFTC should modify the CEA and CFTC Regulations (1) to expand the scope of persons who must register to include, inter alia, persons who use ATSs and who have trading privileges on, or direct electronic access to, derivatives exchanges (or trading venues), and (2) to implement an identification program for ATSs and algorithms. Lastly, Congress and the CFTC should consider proposals in research by academics in philosophy and law concerning (1) ways to ensure that digital intermediaries are built not just to be intelligent but also to be ethical, and (2) methods for allocating liability for wrongdoing by digital intermediaries.