DARPA Seeks AI to Find and Fix Digital Market Flaws

By Amara Osei

DARPA estimates the early-2000s California energy crisis cost $40 billion to $45 billion. The Pentagon's research arm, the Defense Advanced Research Projects Agency, is targeting hidden flaws in the rules governing US financial and other digital markets. DARPA's new Intrinsic Market Resilience program seeks AI tools to find counterexamples before adversaries exploit them for economic disruption.

Matthew Wilding, the program manager for DARPA's Intrinsic Market Resilience program, told Business Insider: “I think that the incredible advances in automated reasoning and in AI are opening new ways to defend things.” Wilding said the same technologies can support attacks, but DARPA will use them to find counterexamples and recommend design improvements.

Wilding said the program applies AI and automated reasoning advances from the last few years to make electronic markets more resilient and dependable. DARPA says electronic markets have become faster and more efficient as their growing interconnection opens new avenues for disruption.

DARPA's program covers electronic markets tied to stocks, bonds, energy and cloud-computing resources. DARPA says the greater concern is market-design exploitation, rather than conventional hacking or data theft, both longstanding threats. DARPA focuses instead on adversaries exploiting weaknesses in market design itself.

What did the two market disruptions reveal?

DARPA's second example was the 2010 flash crash, when U.S. stocks plunged within minutes amid market instability. Investigators later linked the episode in part to one individual's manipulative trading practices, among other problems, DARPA said. Many of those design gaps have since been corrected, according to DARPA.

“The actions cost the individual nothing because the sell orders were specifically designed not to be executed by leveraging a quirk in the design of the market,” DARPA said in its solicitation. That example still informs DARPA's focus on closing design gaps before adversaries can exploit them.

DARPA's first example involved traders exploiting weaknesses in California's newly deregulated energy market and contributing to the early-2000s crisis. The disruption forced the federal government to invoke the Defense Production Act to ensure the supply of natural gas to military facilities, DARPA said. DARPA said the episode highlighted how manipulation of market mechanisms could affect military readiness.

How will DARPA test market resilience?

DARPA wants performers to use large language models to turn regulatory filings and technical specifications into computer models of how markets operate and interact. The solicitation says those models will simulate markets, analyze protections and point out potential weak points.

DARPA wants performers to identify design flaws in domestic online equity markets and recommend repairs. DARPA's stated goal is to prevent bad actors from exploiting equity-market design vulnerabilities.

DARPA says a model that cannot prove a market meets a resilience standard must generate a specific example of how the market could fail. DARPA says users would then identify the weakness and propose a fix.

Wilding said the work goes beyond testing because DARPA will analyze where markets fail. He said the system must show whether a market is resilient, where it is not, and how defenders could improve it.

Who is the program trying to stop?

DARPA says the program does not target rogue market manipulation that regulators typically pursue for financial profit. DARPA focuses instead on bad actors seeking disruption, economic damage or instability by exploiting gaps in legal and regulatory safeguards.

DARPA says the number of electronic markets and participants is rising, increasing the risk of deeply damaging exploitation. DARPA also says AI and other new technologies have lowered the barrier to entry for bad actors.

DARPA intends to use the same AI capabilities that lower barriers for bad actors to model markets and test defenses. DARPA expects the approach to help defenders identify vulnerabilities before adversaries exploit them.

Why is market design a national-security issue?

DARPA frames the solicitation as part of a growing national-security concern that future attacks on the United States may not resemble conventional military action. DARPA says future attacks could exploit vulnerabilities in digital infrastructure, supply chains or markets.

DARPA's immediate measure of success is a specific failure example and a recommended design repair. As the number of markets and AI use expands, DARPA's larger test is whether those repairs can make critical electronic markets more dependable.