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Canadian Journal of Law and Technology

Keywords

Algorithms, price-fixing, regulating algorithms. Financial trading industry

Abstract

The use of computerized algorithms is increasingly common in the modern business environment. An algorithm can be defined as ‘‘a set of mathematical instructions or rules that, especially if given to a computer, will help to calculate an answer to a problem.” As noted in this definition, algorithms are particularly powerful tools when combined with computing power. The proliferation of computerized algorithms in business settings has occasionally led to unintended and injurious outcomes. This is perhaps most notable in relation to the algorithmic trading of securities. The 2010 ‘‘Flash Crash” of the United States (U.S.) financial markets, during which key markets lost and then regained over a trillion dollars in value over the span of 36 minutes, was caused, at least in part, by the intentional manipulation of algorithmic trading processes. Another example is that of Knight Capital, a financial services firm, which, in 2012, lost approximately USD 440 million in just 45 minutes due to a faulty algorithm. Unsurprisingly, securities regulators stand at the forefront of regulating algorithms, with U.S. and European (E.U.) agencies both developing policies in this regard. Complying with regulations aimed at algorithms will be a novel challenge for the financial trading industry.

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