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FRM Part II · FRM Exam Part II · The Financial Stability Implications of Artificial Intelligence

Which measure would best help a regulator monitor potential AI-related herding across the trading firms it supervises?

A regulator should track how similar firms' positions and trading signals are across the cross-section over time. Herding means behavior converges, so rising similarity is a direct indicator; model counts, volumes, or marketing statements do not reveal whether firms are positioned alike.

  1. ATracking the cross-sectional similarity of firms' positions and trading signals over timeCorrect
  2. BCounting the total number of AI models deployed by each firm
  3. CMeasuring each firm's average daily trading volume only
  4. DReviewing the firms' marketing materials about AI use

Explanation

Herding is about similarity of behavior, so measuring how alike positions and signals are across firms directly captures it. Counting models or volume does not show whether behavior converges, and marketing materials are not a risk measure.

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