Jack Leitao

Date Approved

2024

Degree Type

Open Access Senior Honors Thesis

Department or School

Accounting and Finance

First Advisor

Ivan Rodriguez, Ph.D.

Second Advisor

Yu Zhang, Ph.D.

Third Advisor

Charles Teague III, Ph.D.

Abstract

Artificial intelligence has been playing an increasingly important role in the function of financial markets since the 1980s and the inception of program trading. The technology has evolved and has reached a more adolescent phase of development. As the technology has evolved, the risks introduced by massive algorithms keeping the markets humming have become more evident. The relationship between market volatility and trading volume adds risk as the speed and size of the trading activity has increased. High-frequency trading algorithms, while developed and refined by highly sophisticated institutions, still are at risk of succumbing to human error. Overall, algorithmic trading has benefitted the financial markets in several ways, specifically efficiency. However, the role of market regulators is to protect investors from undue harm. Therefore, there are steps that the government and regulatory agencies could take to help guard the markets from risks posed by algorithmic trading. While regulators can help lower risk, the technology quickly evolves, and not all risks can be contained. It is not the role of regulators to eliminate risk but it is their role to mitigate it in any feasible way.

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