An Introduction to Legal Aspects of Algorithmic ‎Trading in the Stock and Securities Market

Document Type : Research Paper

Authors

1 Assistant Professor of Private Law, Faculty of Law and Political Sciences, ‎Shiraz University, Shiraz, Iran. ‎

2 PhD Student, Private Law, Faculty of Law and Political Sciences, Shiraz ‎University, Shiraz, Iran. ‎

3 Associate Professor of Private Law, Faculty of Law and Political Sciences, ‎University of Tehran, Tehran, Iran. ‎

Abstract

Abstract
The term algorithm in various disciplines has its roots in algebra which is one important part of mathematics. Algebra in the course of time has contributed to many developments and achievements in various disciplines such as economics, informatics science, and computer science; and through this process, algorithm transactions have emerged. With the widespread use of artificial intelligence algorithms in various aspects of human life, individuals' transactions in various markets have also taken on a fresh new-look. Nowadays, what is considered as algorithmic transactions in the securities markets has some practical demonstrations. The use of algorithms of artificial intelligence in technical analysis of the market data, the proposal for entering into an optimal transaction with a trader, and then a decision to make a transaction in a specific time and within a specific bid and ask scope which is contemplated by the trader is an example of such innovation. The use of algorithms in market data analysis, identifying appropriate investment opportunities, selecting optimal stock portfolios, placing orders, and formation and execution of contracts, are just a few aspects of the applications of these thoughtful and mysterious brains in the legal trading arena.
Due to the unique features of algorithms in terms of speed, accuracy and intelligence, they have been very effective in the financial efficiency of the market players and have been very popular among retail consumers, institutional investors and issuers of securities. Given the market's compelling need for auxiliary tools, the explosive volume of traders' transaction information, issuers, and publicly traded stocks, algorithmic trading in the capital market has flourished; an area that is not only managed and controlled by the regulations governing private contracts but also by the requirements of the government's regulatory role in these markets. However, despite the above-mentioned advantages, there have been challenges associated with this process. Such challenges include unfilled expectations of the counterparties in the transactions, the ambiguities and vagueness of the decision, and the way the algorithm functions. Also the competitive fractions among the traders and market players, lack of legal, regulatory, and technical transparency in the process of algorithmic transactions, undermining of principles of equity and good faith, and weakness in the protection of the consumers are problems that follow the association of the artificial intelligence in capital markets transactions. The adaptability of trading algorithms to legal rules has raised new questions, each of which opens up new horizons in contract law, competition law, civil liability, etc. In practice, with the expansion of the use of this kind of transaction, legal experts and legislators could have a better mental adjustment and awareness in facing the consequences and corollaries of algorithmic transactions in the securities markets and this readiness and awareness shall ensue many advantages.
This study, while examining the legal dimensions of algorithmic trading in the capital market, addresses economic and legal challenges and strives to pave the way for interested parties in this field with several proposed solutions for future studies. This paper, therefore, through giving a picture of such algorithmic transactions in the securities markets and capital markets seeks to highlight and demonstrate the intersection between law and artificial intelligence with a focus on the legal challenges associated with the capital market. The paper also seeks to attract the attention of the readers and experts in this field to set the necessary guidelines and encourage them to adopt a scientific approach in dealing with such a phenomenon. For this purpose in this paper, we shall first discuss the concepts and species of algorithmic transactions and then by positing the legal challenges associated with such transactions, shall seek to come up with solutions to tackle such legal challenges. The contribution of this work is offering some framework and safe legal infrastructure for the promotion of the use of algorithmic transactions in the securities market.   
                 

Keywords

References

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Law Quarterly
Volume 53, Issue 2
August 2023
Pages 185-204

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