RAFAŁ MICHALCZAK
SOFTWARE AGENTS AS INTERNATIONAL ISSUE – CAN WE
AFFORD DIVERGENCE?
Rafał Michalczak*
Jagiellonian University in Kraków, Poland
Abstract. We live in the globalised world which, due to rapid development of communication technologies, become smaller and tighter. From the legal point of view, especially in the economics we could observe
interweaving factors of national and international regulations which are in constant interplay. Nowadays
economics is global system with no parts which can be treated separately. This situation is contribution of
modern communication means, strictly speaking: development of the Internet. But beside positive impact
this improvements create completely new category of problems.
According to Bank of England and TABB Group data for 2010 more than half stock trading in the USA
and more than one third in the Europe (both in volume and value) couldn’t be simply ascribed to humane
traders. It is consequence of a progress in algorithmic trading – an introduction of so called high-frequency
trading made by programs (which could be also called software agents).
After short introduction in the subject of SA (putted at the background of “artificial intelligence & law”)
I’d like to try to answer a question: “Whether we can afford divergence in regulation of such international
issue as software stock traders?” SA are hitherto unregulated issue. It is said, that it may have many negative
consequences (e.g. 2010 Flash Crash). Many countries (Germany, USA) are starting debate about fundaments of such regulations. I think, that it is high time to realize SA problem is immanently international and
unified regulation (even if only at the elementary level) will be beneficial for all participants of legal and
economic systems. I’ll support my hypothesis with theoretical investigations on how differences in status of
SA could make international trade very difficult or even impossible. I’ll try to show that for the first time in
history background created by philosophy of artificial intelligence have practical implication for legal policy.
Keywords: Autonomous software agents, HFT, liability, contract law
INTRODUCTION
We live in the globalised world which, due to rapid development of communication technologies, become smaller and tighter. From the legal point of view, especially in the economics we
could observe interweaving factors of national and international regulations which are in constant
interplay. Nowadays economics is a global system with no parts which can be treated separately. This
* Mgr (Master) Rafał Michalczak is a PhD student at the Faculty of Law and Administration at the Jagiellonian University in Kraków. He graduated law (master degree) and philosophy (bachelor degree). Currently, beside preparation of PhD
thesis in law he also prepares master thesis in philosophy. His scientific interests oscillate between philosophy of technology
and philosophy of artificial intelligence and their influence on legal theory and practice. Especially he is interested in a role
of artificial intelligent agents in the legal system. His field of scientific investigations also covers theoretical aspects of implementation of expert systems to model legal reasoning.
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situation is a consequence of modern communication means, strictly speaking: development of the
web. But beside positive impact this improvements create completely new category of problems.
I will focus on very specific problem: theoretical and policymaking aspects of using software
agents in equity trading. At the beginning I introduce and clarify shortly main concepts. I also point
main theoretical problems. Then I bring some evidences, that the issue is on the one hand very
up-to-date and on the other extremely important. On such background I try to consider possible
answers for the question whether we can afford divergence in regulation of software stock traders.
I claim that varied regulation in different countries wouldn’t be sufficient solution. I also claim, that
without deeper consideration and attempt to build unified model of making contracts by software
agents such approach will be ineffective to some degree.
* * *
At the beginning I have to define key concepts of this paper. Of course the most important
one is “software agent”. There is many difficulties with this term, especially when we try to find
legal definition. It might be useful to refer to United Nations Convention on the Use of Electronic
Communications in International Contracts which in article 4 defines “Automated message system”
as “a computer program or an electronic or other automated means used to initiate an action or
respond to data messages or performances in whole or in part, without review or intervention by
a natural person each time an action is initiated or a response is generated by the system”1. This
definition seems not very clear, especially with such abstract notions as “computer program or an
electronic or other automated means” – it is extremely difficult to imagine nowadays any automated
mean with mentioned properties, that is not a computer program. It is of course the consequence
of so called technological neutrality, which means, that legal acts are “intended to provide for the
coverage of all factual situations where information is generated, stored or transmitted in the form
of electronic communications, irrespective of the technology or the medium used”2.
The most important part of this definition is, where it is stressed that software program should
act “without review or intervention by a natural person each time an action is initiated or a response
is generated by the system”. The main aspect of software agent (or, to use more technologically
neutral term: artificial agent) is its autonomy. To provide a definition from the canonical artificial
intelligence textbook: agent is “an autonomous entity which observes through sensors and acts upon
an environment using actuators and directs its activity towards achieving goals”3. This definition is
very wide: if we think a little we could easily realize that it could be applied also to natural agents
as humans or animals. But it has to be emphasized, that it isn’t applicable only to material beings;
the most important ones are software agents, that act in virtual (which isn’t hear an opposition
1
United Nations Convention on the Use of Electronic Communications in International Contracts 2005 art. 4 http://
treaties.un.org/doc/Treaties/2005/11/20051128%2004-23%20PM/Ch_X_18p.pdf
2 http://www.uncitral.org/pdf/english/texts/electcom/06-57452_Ebook.pdf
3
S. Russell, P. Norvig, ‘Artificial Intelligence A Modern Approach’ (Upper Saddle River, New Jersey: Prentice Hall
2009) 34
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for “real” but for “material”) environment through specific sensors and actuators suited for a
virtual world. The short and easy example, which may be futuristic but is the best way to illustrate
the whole idea is an virtual agent (this time in legal meaning as a person who is authorized to act
on behalf of another to create a legal relationship with a third party4). It means the virtual entity
which by use of semantic web is able to take care about one’s daily affairs e.g. register she/he to
a doctor, plan meetings, buy everyday goods5.
Mentioned applications are very illustrative but also only experimental. So they are useful to
introduce main concepts although aren’t very practical. But the focal area of this paper is more
refine version of software agents, which isn’t only experimental. Moreover it has great importance
in the world of economics and, by this application, for everyday life of everyone of us.
According to Bank of England and TABB Group data for 2010 more than half stock trading in
the USA and more than one third in the Europe (both in volume and value) couldn’t be simply ascribed to humane traders. It is consequence of a progress in algorithmic trading – an introduction
of so called high frequency trading made by programs (which due to adopted convention I will
call software agents). High frequency trading is “a type of strategy that is engaged in buying and
selling shares rapidly, often in terms of milliseconds and seconds”6. Of course such speed exclude
typical human traders because decisions have to be made extremely quick. Moreover it excludes
any real supervision over the behaviour of software programs, which play their economic games
only between themselves.
Mentioned software programs are very sophisticated and complicated tools. Although I don’t
want to consider this issue in detailed way, it has to be stressed, that the sophistication has very
grave consequences. Strictly speaking the behaviour of that programs is unpredictable; due to
application of heuristic algorithms and techniques of machine learning they could be analyze
rather in empirical way (by observation of patterns of their actions). According to view of some
legal theoreticians it is even sufficient condition to ascribe to the programs some kind of autonomy understood legally7. Worth noting is fact, that according to some views the most sufficient
way to regulate such issue is to introduce new type of person to contract law – electronic person
constructed in the similar way as legal person8.
Nowadays we witness rising interest in regulating described branch of equity trading. Hitherto
use of software agents was mostly unregulated. From the one perspective it could be seen as
perfectly normal. If one is advocate of laissez-faire or other liberal or libertarian doctrine it seems
that it is the best way to proceed with such free market issues. Use of specific tools which aren’t
harmful or couldn’t be considered as unfair business practices is totally admissible. But even
4 E.g. Polish Civil Code 1964 art. 95-109
5
T. Berners-Lee, J. Hendler, O. Lassila, ‘Sieć semantyczna’ [2001] Świat nauki 7/2001 43
6 J. A. Brogaard, High Frequency Trading And Its Impact On Market Quality [2010] http://www.futuresindustry.org/
ptg/downloads/HFT_Trading.pdfs 4
7 S. Chopra, L. White, ‘A Legal Theory for autonomous artificial agents’ (Michigan: University of Michigan Press 2011) 9
8 Ibid. 153
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doctrines which emphasize value of unbounded freedom in economics (when the most extreme
are rejected) agree, that the state have to protect citizens against the most harmful proceedings.
The necessity of the protection appeared in the most vivid way during the so called “Flash Crash
2010”. One of the analysis described this event in following words: “On May 6, 2010, in the course
of about 30 minutes, U.S. stock market indices, stockindex futures, options, and exchange-traded
funds experienced a sudden price drop of more than 5 percent, followed by a rapid rebound”9. To
make this picture more illustrative it may be good to bring actual market value that disappeared: in
the half an hour market value decreased by 1 trillion USD. The event realized that some regulation
in the whole area of computer based trading are inevitable.
There are few ongoing attempts to regulate algorithmic trading. In the United States the Commodity Futures Trading Commission debates on the definition of high frequency trading10. In the
European Union take place the discussion about amending of The Markets in Financial Instruments
Directive 2004/39/EC and so called The Market Abuse Directive 2003/6/WE. Although due to
insufficient restrictions German parliament tries to enforce special legislation for high frequency
trading called “Hochfrequenzhandelsgesetz” (Full title: “Entwurf eines Gesetzes zur Vermeidung
von Gefahren und Missbräuchen im Hochfrequenzhandel”)11.
Main problem which isn’t linked to merits of the regulations is its form. United States are trying
to create their own definitions and regulations. European Union is trying to make its own legal
boundaries but due to characteristics of EU legislative process (it is time-consuming and it isn’t
very elastic) some member countries are trying to regulate this issue by their own like Germany
mentioned before. There is no need to argue that in modern economic system if something is
prohibited in one place it will emerge in the other place. For example while the German state try
to prohibit high-frequency trading the Warsaw Stock Exchange adapts new trading system (UTP)
which main aim is to allow high-frequency trading. In Poland although detailed regulations of the
issue don’t exist.
But there is second problem. Every single of this attempts base on the assumption that what is
unnatural and dangerous is the great speed of transaction and it tendency to overreaction which
doesn’t correspond to real economics. Although it is possible to find some notions about autonomy of such programs e.g. “Proposal for a directive of the European Parliament and of the council
on markets in financial instruments repealing Directive 2004/39/EC of the European Parliament
and of the Council” contain description: ”Many market participants now make use of algorithmic
trading where a computer algorithm automatically determines aspects of an order with minimal
or no human intervention”12 there is no emphasis on this aspect.
9
A. A. Kirilenko, A. S. Kyle, M. Samadi, T. Tuzun, ‘The Flash Crash: The Impact of High Frequency Trading on an
Electronic Market’ [2011] http://dx.doi.org/10.2139/ssrn.1686004 access: 26.03.2013 2
10 http://www.aima.org/en/regulation/markets-regulation/high-frequency-trading/index.cfm access: 25.03.2013
11 http://dip21.bundestag.de/dip21/btd/17/116/1711631.pdf access: 25.03.2013
12 Proposal for a Directive Of The European Parliament And Of The Council on markets in financial instruments repealing Directive 2004/39/EC of the European Parliament and of the Council (Recast) - Presidency compromise 2013 http://
register.consilium.europa.eu/pdf/en/12/st11/st11645.en12.pdf
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There is a question though whether we can afford divergence in regulation of software stock
traders? As I pointed out the biggest problem is the lack of the unification in the field of use of
software agents. Current trend is to make national regulations in countries which telecommunication
infrastructure allow high-frequency trading or to blindly develop such infrastructure only to allow
introduction of the method in countries which are still unable to maintain sophisticated versions of
computer base trading. There is no effort to pass more general regulations on multinational level. As
I tried to show the consequences of completely unregulated algorithm trading would be very grave.
International regulations would provide general framework that would protect countries which
are new in the field of high-frequency trading against mistakes, which ware already committed.
Moreover in my opinion there exist even more efficient way. High-frequency trading is a part
of wider issue – contracts made by autonomous software agents. Of course there is a possibility
to treat only symptoms of misbehaviour of such software programs as in mentioned legal acts.
But the better way would be to find fundaments of this problem and try to look for an answer
for the question how to construct liability framework when the new party emerge – some kind of
electronic entity which is able to make their own, unpredictable decisions.
CONCLUSION
I tried to show the brand new problem in the field of theory o law – autonomous software
agents. I chose high frequency trading as the most vivid example of the issue. I showed that it isn’t
merely theoretical problem. In fact, it is the major issue in the world of economics. I also tried to
show, that different national regulations would bring more problems than solutions, in consequence
of highly internationalized nature of modern economics.
Although I think, that some regulations are crucial I’m sure that overregulated legislation would
bring troubles. There are some opinions, that even very emergence of high-frequency trading is a
consequence of too strict legal prohibitions13. In my opinion the best way is not to regulate only
part of the problem. The most efficient would be to try investigate whole problem from its fundaments. It would be of course harder task but it would be more beneficial.
As I mentioned contracts made by computer programs are a brand new issue. The regulatory
task would require deeper studies. Although it would have practical consequences the theoretical
background would be inevitable. By calm investigation, which isn’t driven by momentary needs,
legislators reinforced by legal theoreticians would create new model of contracts, which would
be sufficient for word with exponentially growing impact of the technological factor. Legal theory
merged with philosophy of artificial intelligence would provide detailed overview of the issue of
autonomous artificial agents in the law and offer lawmakers an insight preventing against temporary
and partial regulations which would have to be changed shortly after introduction.
13
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http://www.cnbc.com/id/100276801 access: 27.03.2013
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