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FRM Part II · FRM Exam Part II · Advances in Artificial Intelligence: Implications for Capital Markets Activities

A broker-dealer replaces its keyword-based trade surveillance rules with a machine learning model that scores orders for potential spoofing. Compliance observes that the new model flags far fewer alerts overall, but the alerts it raises are much more often confirmed as genuine misconduct. Which statement best describes the change in the model's performance?

Precision has increased because a larger share of the flagged alerts are genuine misconduct. However, generating fewer alerts could mean some real cases are missed, so recall may have fallen. Fewer alerts alone do not show higher recall, zero false negatives, or overfitting.

  1. APrecision of alerts has increased, although recall may have fallenCorrect
  2. BRecall has necessarily increased because fewer alerts are generated
  3. CThe false negative rate must have decreased to zero
  4. DThe model is overfitted because alerts are fewer

Explanation

Precision is the share of alerts that are true positives, so more confirmed alerts per alert means higher precision. Fewer alerts can mean missed misconduct, so recall may have fallen. Fewer alerts do not imply higher recall or overfitting.

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