Could AI trading lead to market 'flash crashes'? — The Crypto Mile - Yahoo Finance UK

Watch: Could AI trading lead to ‘flash crashes’ in the market?

AI-enhanced trading bots could escalate the risk of flash crashes if financial markets become overly automated and have “no plug to pull out”, a leading VC founder has claimed.

On this week’s episode of Yahoo Finance UK’s The Crypto Mile, Jamie Burke, founder of Outlier Ventures, discussed the potential risks posed by AI-bots acting as complex trading agents in financial markets.

Burke said AI agents could use specialised trading bots to manage wealth according to an individual’s risk profile.

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However, he warned about the possibility of flash crashes if markets become overly automated and rely heavily on popular AI models.

A financial market flash crash is a sudden, rapid, and steep drop in securities prices within a short period, often caused by automated trading systems reacting to an unusual market event or condition.

While such incidents can be controlled in traditional markets by freezing trading, the automation of diverse markets leaves no plug to pull, which could lead to more volatility.

This shift from human to bot trading is moving across almost every market, including travel, hospitality, and supply chain, as markets become more automated.

Some benefits automation may bring to various markets, such as optimising utilisation of commodities and assets, it also complicates the system. “In an incredibly complex system where there’s no plug to pull out, early decades of AI bots will see more volatility as these markets learn to function with AI coordination,” warned Burke.

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However, Burke sees significant business opportunities in developing AI agents that help businesses and investors offset this volatility and risk.

Turning his attention to ‘oracles’ — real-world data sources for AI bots — Burke pointed out the necessity of correct information flow between on- and off-chain environments.

“Oracles of such a high standard have been created that you could build financial products on them,” Burke said, with already developed indices combining on- and off-chain assets. These products rely on the robust standard of the underlying oracle, holding potential for regulated financial products.

The widespread adoption of AI bots in trading is not without risks. Still, with proper management, risk offset, and high-standard oracles, Burke foresees a dynamic, evolving market environment.