Bubble, Bubble, AI’s Rumble: Why Global Financial Regulatory Incident Re-Porting Is Our Shield Against Systemic Stumbles

Abstract

"Double, double toil and trouble; Fire burn and cauldron bubble." As Shakespeare's witches foretold chaos through cryptic prophecies, modern capital markets grapple with systemic risks concealed by opaque AI systems. According to the IMF, the August 5, 2024, plunge in Japanese and U.S. equities can be linked to algorithmic trading, yet absent from the existing AI incidents database, exemplifies this transparency crisis. Current AI incident databases, reliant on crowdsourcing or news scraping, systematically overlook capital market anomalies, particularly in algorithmic and high-frequency trading. We address this critical gap by proposing a regulatory-grade global database that synthesises post-trade reporting frameworks with proven incident documentation models from healthcare and aviation. Our framework's temporal data omission technique masks timestamps while preserving percentage-based metrics, enabling sophisticated cross-jurisdictional analysis of emerging risks while safeguarding confidential business information. Synthetic data validation (modelled after real life published incidents) (n=2,999 incidents) reveals compelling patterns: systemic risks transcending geographical boundaries, market manipulation clusters distinctly identifiable via K-means algorithms, and AI system typology exerting significantly greater influence on trading behaviour than geographical location, This tripartite solution empowers regulators with unprecedented cross-jurisdictional oversight, financial institutions with seamless compliance integration, and investors with critical visibility into previously obscured AI-driven vulnerabilities. We call for immediate action to strengthen risk management and foster resilience in AI-driven financial markets against the volatile "cauldron" of AI-driven systemic risks, promoting global financial stability through enhanced transparency and coordinated oversight.