Market manipulation is an old issue. People try to make money off unsuspecting investors by artificially influencing the price of a stock. But what about when the one manipulating markets isn’t human?

MARY LOUISE KELLY, HOST:

As long as financial markets have existed, so has market manipulation. But what if the people engaging in market manipulation aren’t people at all? The indicators, Adrian Ma and Wailin Wong uncover how AI could disrupt financial markets.

ADRIAN MA, BYLINE: There are a lot of ways that AI can be used to manipulate financial markets, but to help us wrap our heads around it, we’re going to sort them into two basic buckets. The first is what you might think of as human-led manipulation.

WAILIN WONG, BYLINE: And to help us explain, we called up Nicol Turner Lee. She’s director of the Center for Technology Innovation at the Brookings Institution. In her research, Nicol outlined ways AI could be used to mess with markets. One big one is by spreading misinformation.

NICOL TURNER LEE: We see this every day in the analog world – announcements gets made by the president on tariffs, the market goes awry. When you have something that’s embedded in the technical system, what’s even scary about this area is you may not know where it emanates from.

WONG: Generative AI makes it super easy for bad actors to manufacture misinformation. With a few keystrokes, anyone can make a fake news article or a deepfake recording. And with the help of bots, they can easily spread the misinformation across the internet.

MA: But what if AI could use AI to manipulate markets? What? What we’re talking about here is AI-powered trading bots run amok. Now, trading bots are not an entirely new thing, of course. For years, hedge funds have been using them to carry out high-frequency trading. But as finance professor Ekaterina Svetlova says, those bots still require a lot of human input to tell them how to trade.

EKATERINA SVETLOVA: In case of high-frequency trading, you gave a machine a clear rules what to do. And now we have algorithms which don’t receive clear rules from humans.

WONG: At the University of Twente in the Netherlands, Ekaterina studies how technology shapes financial markets, and she says these new algorithms have given rise to a more intelligent kind of trading bot powered by AI machine learning. In particular, something called reinforcement learning. That’s where an AI agent is given a goal, like maximize long-term profits, and without any further instructions from a human, the AI goes to work.

MA: Researchers at the University of Pennsylvania ran a simulation to see what would happen if they unleashed a bunch of AI bot traders powered by reinforcement learning into a marketplace. And what they found was that instead of trading against each other, like you would expect in a competitive market, these bots started colluding with one another to manipulate the market. And what’s wild about this is that if humans engage in this type of financial market collusion and manipulation, they’d be breaking the law. But the crime of collusion and market manipulation has historically required human intent.

WONG: So who’s responsible if a gang of trading bots go on a financial crime spree? Nicol Turner Lee of the Brookings Institution says this is a legal gray area, and regulations are probably needed to fix that. Like all the experts we spoke to, Nicol says AI is not inherently a bad thing for financial markets. It can be used, for example, as a tool for detecting fraud.

MA: But with regulators still playing catch up, that means a lot of power rests with the financial firms who are experimenting with these AIs and still discovering what they can do.

WONG: Wailin Wong.

MA: Adrian Ma, NPR News.

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