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. 196 POLITIKA KAIP TUŠČIA VIETA
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 POLITIKA KAIP TUŠČIA VIETA 197
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 party 4 ). 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 goods 5. 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 legally 7. 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 person 8. 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. 153 198 POLITIKA KAIP TUŠČIA VIETA
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 trading 10. 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 POLITIKA KAIP TUŠČIA VIETA 199
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 prohibitions 13. 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 http://www.cnbc.com/id/100276801 access: 27.03.2013 200 POLITIKA KAIP TUŠČIA VIETA
Bibliography: Allen, T., Widdison, R. (1996). Can Computers Make Contracts?, Harward Jurnal of Law & Technology, 9(1), 25-52. Andrade, F., Novais, P., Machado, J., Neves, J. (2007). Contracting agents: legal personality and representation. Artificial Intelligence and Law, 15, 357-373. Antoniou, G., van Harmelen, F. (2008). A Semantic Web Primer. Massachusetts. Berners-Lee, T., Hendler, J., Lasilla, O. (07.2001). Sieć semantyczna. Świat nauki, 41-29. Brogaard, J. A. (2010). High Frequency Trading And Its Impact On Market Quality. http://www.futuresindustry. org/ptg/downloads/hft_trading.pdfs 4 Chopra, S., White, L. Artificial Agents Personhood in Law and Philosophy. http://www.sci.brooklyn.cuny. edu/~schopra/agentlawsub.pdf Dahiyat, E. A. R. (2007). Intelligent agents and contracts: Is a conceptual rethink imperative? Artificial Intelligence and Law, 15, 375-390. Dahiyat, E. A. R. (2010). Intelligent agents and liability: is it a doctrinal problem or merely a problem of explanation? Artificial Intelligence and Law, 18, 103-121. Finance Watch. (04.2012). Investing not betting. http://www.finance-watch.org/wp-content/uploads/2012/04/ Investing-not-betting-Finance-Watch-position-paper-on-MiFID-22.pdf Kirilenko, A. A., Kyle, A. S., Samadi, M., Tuzun, T. (2011). The Flash Crash: The Impact of High Frequency Trading on an Electronic Market. http://dx.doi.org/10.2139/ssrn.1686004 Russell S., Norvig P. (2009). Artificial Intellitence A Modern Approach. Sartor, G. (2009). Cognitive automata and the law: electronic contracting and the intentionality of software agents. Artificial Intelligence and Law, 17, 253-290. United Nations Convention on the Use of Electronic Communications in International Contracts. 2005. POLITIKA KAIP TUŠČIA VIETA 201