Cyber risks pose the single biggest threat to modern financial markets - CFTC

Cyber risks pose the single biggest threat to modern financial markets - CFTC

Cyber risks are the "number one threat to 21st century financial markets", far outstripping the disruptive potential of advances in automated trading and emerging technologies like the blockchain, a senior official at the Commodity Futurues Trading Commission has warned.

In a speech at Harvard Law School outlining six mega-trends reshaping financial markets, CFTC commissioner Christopher Giancarlo pinpointed cyber warfare as the most pressing issue facing regulatory agencies in the years to come.

"Market regulators should have no illusions about the fact that cyber belligerents - both foreign and domestic - view the world’s financial markets as 21st century battlefields," he said. "Cyber enemies could use a range of new battlefield tactics to try to cripple financial markets, from destroying the course of banking and trade settlement transactions to using poison pill algorithms to flood markets with bad data and fake trades in order to drive trading volatility and market collapse."

Cyber hostilities will not end anytime soon, he continued. "They will be relentless for years, if not decades, to come".

In combatting the threat, regulators must use "many carrots and a few sticks" to flexibly move financial market participants and operators to a state of continually optimised and up-to-date cyber defense, Giancarlo told the audience.

The emergence of the cyber-bogeyman coincides with a rapid evolution in financial market trading, driven by advances in digital technology.

The rapid shift to automated trading also presents a host of new challenges, including increased risk of sudden spikes in market volatility and “phantom” liquidity arising from the sheer speed of execution, flawed algorithms and position crowding.

"How global market regulators in markets such as New York, Chicago, London, Hong Kong and Shanghai handle this change from human to automated trading will be extremely important," he said. "It requires delicate balancing. To ensure vibrant, accessible and durable markets, we must cultivate and embrace new technologies without harming innovation. Without doubt, there must be effective safeguards of market integrity and credibility, but those safeguards should not bar promising innovation and continuous market development."

In terms of innovation, the use of distributed ledger technology was highlighted as a mechanism with the potential to revolutionise modern financial ecosystems for the better.

"This transformation will not come without consequences, however, including a greatly disruptive impact on the human capital that supports the recordkeeping of contemporary financial markets," noted Giancarlo "On the other hand, the blockchain will help reduce some of the enormous cost of the increased financial system infrastructure required by new laws and regulations, including Dodd-Frank."

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