US SEC’s Gensler warns of securities-market concentration among cloud-computing providers with AI

01 Sep 2021 7:51 pm by Neil Roland

AI

The securities industry’s outsourcing to just a few cloud-computing providers that rely on artificial intelligence to process massive data volumes creates market concentration that poses systemic risk, said Gary Gensler, head of the US Securities and Exchange Commission.

“We could turn around in the year 2027 or 2032 and say, my gosh the crisis we just got was that everybody was relying on the same mortgage data, or the same cloud provider, and the cloud provider puts an AI as a service on top of the cloud,” Gensler told the European Parliament Committee on Economic and Monetary Affairs today.

He added: “There’s a lot of interconnectedness and data concentration that just simple economics will drive to that.”

Gensler cited AI forms known as “deep learning” and “machine learning” that can find correlations but also have “an insatiable desire for data” that leads to concentrations, pointing to Google’s domination of the search market as an illustration.

Financial market participants most commonly outsource data storage and computer processing to cloud services including Amazon Web Services, Microsoft Azure and Alphabet’s Google Cloud.

Request for input

Last week, the Wall Street regulatory agency offered a glimpse of its concerns about risks that cloud concentration might pose in the investment adviser sector.

The SEC request for public input focused on potential conflicts of interest among brokerages that increasingly use prompts, notifications and games to spur more stock trading.

But it also touched on the risks in the adviser sector of cloud concentration, posing questions about outages for market participants to address.

“What terms of service do investment advisers put in place with cloud service providers in connection with the potential for loss of service or loss of data?” it asked. “How do investment advisers interact with clients when the platform is unavailable – for example, when the adviser has lost Internet service or when the platform is undergoing maintenance?”

And the document raised questions posed by advisers’ growing use of AI for robo-advice to create investment strategies, develop advice and increase revenue.

Finra report

A Financial Industry Regulatory Authority report last month said securities firms that have begun to adopt cloud processing are using AI for “new automated workflows and cloud-based tools that enable a greater ability to quickly launch products and innovate.”

Banks rather than securities firms have captured most US regulatory attention in the context of cyber risks posed by cloud concentration.

The US Treasury-led Financial Stability Oversight Council urged Congress last year to give financial regulators adequate authority to oversee cyber defenses of third parties that increasingly provide banks with cloud services and teleworking systems.

“The authority to supervise third-party service providers varies across financial regulators,” the council said in its annual report. “Greater reliance on technology, particularly across a broader array of interconnected platforms, increases the risk that a cybersecurity incident may have severe consequences for financial institutions.”

With reporting by Jack Schickler in Brussels.

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