SEC Chair Warns AI “Herding” Could Drive Markets “Off an Inadvertent Cliff”

Beware a financial “monoculture” created by AI.

Hive Mind

Last month, chairman of the U.S. Securities and Exchange Commission (SEC) Gary Gensler warned that it’s “nearly unavoidable” that AI will lead to financial economic crisis.

Now, at an event with The Messenger, Gensler has reiterated those fears, saying AI’s growing role in the financial sector could create a “herding effect” that could drive entire markets “off an inadvertent cliff.”

He reasons that because AI is costly to develop, most firms are likely to depend on a handful of existing models, fostering a “monoculture.” Whatever decisions those models make could end up informing huge parts of the financial world — potentially leading the entire economy down the same doomed path.

“A smaller asset manager can’t build the big models. You got to rely on someone else’s models,” Gensler said at The Messenger‘s AI Summit on Tuesday, as quoted by Business Insider.

“There are natural economics that will lead to monocultures, that there’ll be base data sets or base models, and large parts of the financial sector will be relying on it… trading on it, underwriting on it,” he added.

Large Lemming Models

AI tools are useful for traders and investors because they can process huge amounts of data in real time, picking up on trends and patterns that may go overlooked by the human eye. In fact, Gensler said that even the SEC uses AI in its “examination and enforcement and economic work.”

To banks, the technology is especially handy at fraud detection, and has already been used for years to process credit card applications and weed out suspicious transactions.

Some of the biggest banks, though, are trying to take things a step further and capitalize on the endless hype around large language models. For example, JPMorgan and Morgan Stanley are developing their own ChatGPT-like AI chatbots that can advise investors — which, if they take off, sounds like they could lead to the exact “monocultures” that Gensler’s worried about.

As far as SEC policy goes, the regulator has proposed a new rule that would require financial firms to address conflicts of interest regarding their use of “predictive data analytics and similar technologies.”

What the SEC plans to do next is unclear, however. When asked if the agency was launching further AI-focused initiatives, Gensler did not specify if there were any such policies in the works.

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