Azzutti, Ringe & Stiehl on Machine Learning, Market Manipulation and Collusion on Capital Markets

Alessio Azzutti (Institute of Law & Economics – University of Hamburg), Wolf-Georg Ringe (University of Hamburg – Institute of Law & Economics, University of Oxford – Faculty of Law, European Corporate Governance Institute (ECGI)), and H. Siegfried Stiehl (University of Hamburg – Department of Informatics) have posted “Machine Learning, Market Manipulation and Collusion on Capital Markets: Why the ‘Black Box’ matters” on SSRN. Here is the abstract:

This paper offers a novel perspective on the implications of increasingly autonomous and “black box” algorithms, within the ramification of algorithmic trading, for the integrity of capital markets. Artificial intelligence (AI) and particularly its subfield of machine learning (ML) methods have gained immense popularity among the great public and achieved tremendous success in many real-life applications by leading to vast efficiency gains. In the financial trading domain, ML can augment human capabilities in both price prediction, dynamic portfolio optimization, and other financial decision-making tasks. However, thanks to constant progress in the ML technology, the prospect of increasingly capable and autonomous agents to delegate operational tasks and even decision-making is now beyond mere imagination, thus opening up the possibility for approximating (truly) autonomous trading agents anytime soon.

Given these spectacular developments, this paper argues that such autonomous algorithmic traders may involve significant risks to market integrity, independent from their human experts, thanks to self-learning capabilities offered by state-of-the-art and innovative ML methods. Using the proprietary trading industry as a case study, we explore emerging threats to the application of established market abuse laws in the event of algorithmic market abuse, by taking an interdisciplinary stance between financial regulation, law & economics, and computational finance. Specifically, our analysis focuses on two emerging market abuse risks by autonomous algorithms: market manipulation and “tacit” collusion. We explore their likelihood to arise on global capital markets and evaluate related social harm as forms of market failures.

With these new risks in mind, this paper questions the adequacy of existing regulatory frameworks and enforcement mechanisms, as well as current legal rules on the governance of algorithmic trading, to cope with increasingly autonomous and ubiquitous algorithmic trading systems. It shows how the “black box” nature of specific ML-powered algorithmic trading strategies can subvert existing market abuse laws, which are based upon traditional liability concepts and tests (such as “intent” and “causation”). In concluding, by addressing the shortcomings of the present legal framework, we develop a number of guiding principles to assist legal and policy reform in the spirit of promoting and safeguarding market integrity and safety.

Creel & Hellman on The Algorithmic Leviathan

Kathleen Creel (Stanford University) and Deborah Hellman (University of Virginia School of Law) have posted “The Algorithmic Leviathan: Arbitrariness, Fairness, and Opportunity in Algorithmic Decision Making Systems” on SSRN. Here is the abstract:

This article examines the complaint that arbitrary algorithmic decisions wrong those whom they affect. It makes three contributions. First, it provides an analysis of what “arbitrariness” means in this context. Second, it argues that arbitrariness is not of moral concern except when special circumstances apply. However, when the same algorithm or different algorithms based on the same data, are used in multiple contexts, a person may be arbitrarily excluded from a broad range of opportunities. The third contribution is to explain why this systemic exclusion is of moral concern and to offer a solution to address it.

D’Onfro on The New Bailments

Danielle D’Onfro (Washington University in St. Louis – School of Law) has posted “The New Bailments” on SSRN. Here is the abstract:

The rise of cloud computing has dramatically changed how consumers and firms store their belongings. Property that owners once managed directly now exists primarily on infrastructure maintained by intermediaries. Consumers entrust their photos to Apple instead of scrap-books; businesses put their documents on Amazon’s servers instead of in file cabinets; seemingly everything runs in the cloud. Were these belongings tangible, the relationship between owner and intermediary would be governed by the common-law doctrine of bailment. Bailments are mandatory relationships formed when one party entrusts their property to another. Within this relationship, the bailees owe the bailors a duty of care and may be liable if they failed to return the property. The parties can use contract to customize the relationship but not to disclaim entirely.

Tracing the law of bailment relationships from its ancient roots to the present, this Article argues that cloud storage should be understood as creating a bailment relationship. The law of bailment, though developed in the Middle Ages, provides a robust framework for governing twenty-first century electronic intermediaries. Though the kind of stored property has changed, the parties’ expectations and incentives have not. Yet the decline of litigation, the rise of arbitration, federal diversity jurisdiction, and the ever-growing dominance of contract has thus far prevented courts from applying the law of bailments to these new services.

Recognizing cloud storage as a bailment would have significant implications. Most immediately, it would suggest that important provisions in many cloud storage services’ contracts are unenforceable. A hand-collected dataset of 61 cloud storage contracts, reveals that most have include general disclaimers for any liability for lost data. These disclaimers are inconsistent with the duty of care that is the foundation of the law of bailment. In addition, understanding cloud storage as a bailment would have important implications for both the law of consumer protection and Fourth Amendment protections.

Recommended.

Didwania on Privacy Amid Prosecution

Vikas Didwania (University of Chicago Law School and U.S. Attorney’s Office) has posted “Privacy Amid Prosecution” on SSRN. Here is the abstract:

Prosecutors increasingly marshal electronic evidence from social media companies like Facebook and Twitter to detect and prosecute crime. For example, today’s prosecutors use social media communications to establish a defendant’s illegal activities online or his relationship to co-conspirators. Under the federal Stored Communications Act, the government is able to obtain electronic evidence by serving social media companies with a search warrant. The same is not true for criminal defendants because, on its face, the Act bans litigants other than the government from subpoenaing social media companies to obtain content information. As electronic evidence becomes more important in criminal prosecutions, defendants have sought to challenge this ban. To date, at least six federal and state appellate courts have confronted the question of whether litigants other than the government can compel service providers to produce content information.

The stakes are high. On the one hand, a decision giving access to criminal defendants and other litigants would open up for discovery the most intimate online communications, photographs, videos, and other content belonging to billions of users worldwide. On the other hand, a decision blocking access means defendants may not be able to obtain the evidence they need as they fight for their liberty. The Supreme Court is likely to soon be asked to address this question.

Criminal defendants have been aided by a scholar who has put forward in the Harvard Law Review an innovative argument that federal privilege law requires allowing litigants to subpoena information from social media companies in a way that the text of the Stored Communications Act appears to preclude. This Article challenges this novel privilege argument. Cases dating back to the telegram era of the late nineteenth century and continuing to modern day show that, contrary to this scholar’s argument, Congress does not have to use any specific language to block defendants’ access to content. Rather, courts have applied the plain text of the law, which, alongside the Act’s structure and purpose, shows that defendants are banned from obtaining content. Moreover, I argue, courts should not rely on this new approach because it will both create a doctrinal mess in a carefully structured statute and will enmesh courts in difficult policy decisions about the privacy of billions of users worldwide. Instead, Congress is best-positioned to reform the statute in a way that balances the serious privacy and liberty interests at stake. Given that legislative change can take time, this Article ends by explaining the tools already available to defendants for obtaining online content.

Frischmann on Common Sense Commons

Brett M. Frischmann (Villanova University – School of Law) has posted “Common Sense Commons: The Case of Commonsensical Social Norms” (Governing Markets as Knowledge Commons, Cambridge University Press, forthcoming) on SSRN. Here is the abstract:

This chapter examines common sense, an important domain of social knowledge. Common sense helps us effectively engage with each other and our complex world, and it often functions as social infrastructure for everyday market transactions and social interactions. Common sense does not mean universal, true, or even accurate; it often is culturally contingent, varied, and erroneous (i.e., common nonsense). The chapter explores governance challenges and the dynamic relationships between common sense, social norms, and technology.

Recommended.

Citron & Solove on Privacy Harms

Danielle Keats Citron (University of Virginia School of Law) and Daniel J. Solove (George Washington University Law School) have posted “Privacy Harms” on SSRN. Here is the abstract:

Privacy harms have become one of the largest impediments in privacy law enforcement. In most tort and contract cases, plaintiffs must establish that they have been harmed. Even when legislation does not require it, courts have taken it upon themselves to add a harm element. Harm is also a requirement to establish standing in federal court. In Spokeo v. Robins, the U.S. Supreme Court has held that courts can override Congress’s judgments about what harm should be cognizable and dismiss cases brought for privacy statute violations.

The caselaw is an inconsistent, incoherent jumble, with no guiding principles. Countless privacy violations are not remedied or addressed on the grounds that there has been no cognizable harm. Courts conclude that many privacy violations, such as thwarted expectations, improper uses of data, and the wrongful transfer of data to other organizations, lack cognizable harm.

Courts struggle with privacy harms because they often involve future uses of personal data that vary widely. When privacy violations do result in negative consequences, the effects are often small – frustration, aggravation, and inconvenience – and dispersed among a large number of people. When these minor harms are done at a vast scale by a large number of actors, they aggregate into more significant harms to people and society. But these harms do not fit well with existing judicial understandings of harm.

This article makes two central contributions. The first is the construction of a road map for courts to understand harm so that privacy violations can be tackled and remedied in a meaningful way. Privacy harms consist of various different types, which to date have been recognized by courts in inconsistent ways. We set forth a typology of privacy harms that elucidates why certain types of privacy harms should be recognized as cognizable. The second contribution is providing an approach to when privacy harm should be required. In many cases, harm should not be required because it is irrelevant to the purpose of the lawsuit. Currently, much privacy litigations suffers from a misalignment of law enforcement goals and remedies. For example, existing methods of litigating privacy cases, such as class actions, often enrich lawyers but fail to achieve meaningful deterrence. Because the personal data of tens of millions of people could be involved, even small actual damages could put companies out of business without providing much of value to each individual. We contend that the law should be guided by the essential question: When and how should privacy regulation be enforced? We offer an approach that aligns enforcement goals with appropriate remedies.

Recommended.

Lemley on The Contradictions of Platform Regulation

Mark A. Lemley (Stanford Law School) has posted “The Contradictions of Platform Regulation” on SSRN. Here is the abstract:

Everyone wants to regulate the big tech companies. The desire to regulate the private actors that control so much of our lives is understandable, and some ideas for regulation make sense. But the political consensus around regulating the tech industry is illusory. While everyone wants to regulate big tech, it turns out that they want to do so in very different, indeed contradictory, ways.

These contradictions of platform regulation mean that it will be very hard to turn anti-tech popular sentiment into actual regulation, because the actual regulations some people want are anathema to others. They suggest caution in imposing regulation and an awareness of the difficult tradeoffs that are involved. But they also suggest a way forward: introducing competition to reduce the influence the tech giants have over our lives.

Golumbia & Pasquale on Corporate Constitutional Rights and Personalized Feeds

David Golumbia (Virginia Commonwealth University) and Frank A. Pasquale (Brooklyn Law School) “From Public Sphere to Personalized Feed: Corporate Constitutional Rights and the Challenge to Popular Sovereignty” (Human Rights after Corporate Personhood, edited by Jody Greene & Sharif Youssef (Toronto: Univ. of Toronto Press, 2020)) on SSRN. Here is the abstract:

What might a society look and feel like in which the free expression rights of for-profit corporations eclipse and override persons’ rights to privacy, and interests in fair political representation? And how might the acceleration of current trends toward corporate personhood erode the autonomy of actual persons? This chapter explores these questions through two prisms: U.S. jurisprudence of corporate free speech rights, and an imaginative evocation of one fictional world this jurisprudence is leading towards.

The first section makes the case that many aspects of American legal culture pave the way to a public sphere in which corporations have far more meaningful political agency and capacity for planning than citizens or even political parties. The second section introduces the setting of M.T. Anderson’s Feed, a dystopian novel with surprisingly rich insight into the habits of mind and character that would naturally thrive in an automated public sphere (and kaleidoscopic personalized feeds) even more dominated by for-profit corporations than our own. We conclude by reflecting on the fragility of opportunities for autonomous self-creation when communications are increasingly monitored, shaped, and monetized for profit.

Netanel on Mandating Digital Platform Support for Quality Journalism

Neil Weinstock Netanel (University of California, Los Angeles – School of Law) has posted “Mandating Digital Platform Support for Quality Journalism” (34 Harvard Journal of Law &Technology (forthcoming Spring 2021)) on SSRN. Here is the abstract:

Our democracy depends on a vibrant press, dedicated to informing the electorate and holding the powerful to account. Yet American newsrooms have suffered a debilitating economic decline in recent years, leaving more than half of U.S. counties without a daily newspaper and precipitating massive reductions in journalist employment. Digital platforms, primarily Google and Facebook, have been a primary cause of newsrooms’ decline. In asserting unparalleled dominance over the digital advertising market, they have siphoned off the advertising revenues that were the lifeblood of the commercial news media. And they have come to be news publishers’ primary gateway to potential readers, leaving newsrooms highly dependent on the platforms’ mercurial content selection and magnification algorithms.

This Article thus proposes legislative initiatives to require digital platform support for quality journalism. Finding current antitrust enforcement initiatives and legislative proposals for news publishers’ intellectual property rights and antitrust exemptions wanting, it sets out blueprints for an excise tax on digital advertising to fund quality journalism and for bolstering newsroom brands by mandating that major platforms give original reporting prominent placement in news feed and search results. News publishers should also have a right to require platforms to include a link to the publisher website and to display a third party media watchdog trustworthiness rating of the publisher’s choice. Finally, major platforms should be required to open their application programming interfaces to enable news publishers to offer the publishers’ own curated news content feed directly to platform users.

Those measure, I argue, should survive First Amendment scrutiny. They might not salvage quality journalism in and of themselves. But they are an important springboard for further government intervention in an ongoing market failure with dire consequences for democratic governance.

Download of the Week

The Download of the Week is “Internet Federalism” by Tejas N. Narechania (University of California, Berkeley – School of Law) and Erik Stallman (University of California, Berkeley – School of Law). Here is the abstract:

The internet is not a cloud. Rather, it is a series of real cables, wires, radio links, and switches connecting places that employ real people and house real computers. Each of these components of the internet’s infrastructure operates in a distinct locale and is subject to distinct market constraints.

This basic yet significant descriptive insight has important implications for regulatory cooperation and competition between state and federal authorities regarding broadband internet access. In the latest battles over network neutrality regulation, for example, state and federal regulators have found themselves at odds over the scopes of their respective authority. The Federal Communications Commission has suggested that the internet’s “inherently interstate” nature, together with its own disavowal of regulatory power over broadband carriage, preempts state regulatory power. But some states insist that they retain the authority to regulate various aspects of these services, local and beyond.

So where on the internet does state power end and federal power begin? The long history of competition and cooperation between state and federal communications regulators suggests a tradition—incomplete and imperfect in places—of subsidiarity, locating decisional power at the most immediately salient local jurisdiction. Such an approach can—and should—inform the allocation of shared regulatory authority over the internet’s infrastructure and services, too. The internet is not one grand, monolithic, interstate thing, immune from state and local regulation under the dormant commerce clause, doctrines of federal preemption, or related limits on state power. Rather, whether states may (and should) regulate depends on technical specifics and regulatory effects. Hence, where local concerns predominate, local authorities may be our most competent regulators; and where federal concerns predominate, federal authorities should take the regulatory reins. Such a pragmatic approach yields important lessons for regulatory power online. Some aspects of internet service require a local touch. Others do not. But identifying an appropriate site for resolving such policy matters demands a close understanding of the technical, market, and regulatory structure of the communications networks that form the modern internet.