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Artificial Intelligence (AI) in the Securities Industry

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Artificial Intelligence (AI) technology is transforming the financial services industry across the globe. Financial institutions are allocating significant resources to exploring, developing, and deploying AI-based applications to offer innovative new products, increase revenues, cut costs, and improve customer service.1 First developed in the early 1940s, AI technology has gained significant momentum over the past decade and become more mainstream due in part to the availability of inexpensive computing power, large datasets, cloud storage, and sophisticated open-source algorithms. In a recent survey-based report, executives at financial institutions noted that “AI is expected to turn into an essential business driver across the Financial Services industry in the short run, with 77% of all respondents anticipating AI to possess high or very high overall importance to their businesses within two years.”2

Broker-dealers are exploring and deploying AI-based applications across different functions of their organizations, including customer facing, investment, and operational activities. In July 2018, FINRA solicited comments from the industry on the potential challenges associated with using and supervising AI applications at broker-dealer firms.3 In response, commenters recommended that FINRA undertake a broad review of the use of AI in the securities industry to better understand the varied applications of the technology, their associated challenges, and the measures taken by broker-dealers to address those challenges. Based on this feedback, FINRA, through its Office of Financial Innovation (OFI), engaged in an active dialogue with the industry over the past year and held meetings with over two dozen market participants, including broker-dealer firms, academics, technology vendors, and service providers to learn more about the use of AI in the securities industry.

This paper summarizes key findings from FINRA’s review in three sections:

  • Section I briefly defines AI and its scope as it pertains to the securities industry for the purposes of this paper.
  • Section II provides an overview of broker-dealers’ use of AI applications related to: (i) communications with customers, (ii) investment processes, and (iii) operational functions.
  • Finally, Section III discusses key factors including potential regulatory considerations, securities market participants may want to consider as they develop and adopt AI-based tools.

The discussion below is intended to be an initial contribution to an ongoing dialogue with market participants about the use of AI in the securities industry. Accordingly, FINRA requests comments on all areas covered by this paper.4 FINRA also requests comments on any matters for which it would be appropriate to consider guidance, consistent with the principles of investor protection and market integrity, related to AI applications and their implications for FINRA rules.

 

1 PwC, Crossing the Lines: How Fintech is Propelling FS and TMT Firms Out of Their Lanes, 2019, https://www.pwc.com/gx/en/industries/financial-services/assets/pwc-global-fintech-report-2019.pdf (reporting that financial services executives expect their AI efforts to result in increased revenue and profits (50%), better customer experiences (48%), and innovative new products (42%).).

2 Ryll et al., Transforming Paradigms: A Global AI in Financial Services Survey, Jan. 2020, http://www3.weforum.org/docs/WEF_AI_in_Financial_Services_Survey.pdf.

3 FINRA, Special Notice on Financial Technology Innovation in the Broker-Dealer Industry, July 30, 2018, https://www.finra.org/rules-guidance/notices/special-notice-07302018.

4 See Request for Comments section of this paper.