Artificial intelligence can make markets more efficient and more volatile

The adoption of artificial intelligence (AI) in financial markets presents both opportunities and risks, potentially improving risk management and liquidity while increasing volatility and opacity.

A recent IMF report highlights a surge in AI-related patent filings, indicating an upcoming wave of innovation, particularly in algorithmic trading.

AI-driven trading, especially in liquid asset classes, is expected to rise, evidenced by higher turnover rates in AI-driven ETFs.

However, this trend could lead to increased market instability and herd-like selling during crises.

Regulators must enhance oversight, particularly for nonbank intermediaries, to manage these evolving risks and ensure market stability.