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Trades by Robot cost Hong Kong businessman $20mn, who does he sue?

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Robots are getting more humanoid every day, but they still can’t be sued.

So a Hong Kong tycoon is doing the next best thing. He’s going after the salesman who persuaded him to entrust a chunk of his fortune to the supercomputer whose trades cost him more than $20 million.

The case pits Samathur Li Kin-kan, whose father is a major investor in Shaftesbury Plc, which owns much of London’s Chinatown, Covent Garden and Carnaby Street, againstRaffaele Costa, who has spent much of his career selling investment funds for the likes of Man Group Plc and GLG Partners Inc. It’s the first-known instance of humans going to court over investment losses triggered by autonomous machines and throws the spotlight on the “black box”problem: If people don’t know how the computer is making decisions, who’s responsible when things go wrong?

“People tend to assume that algorithms are faster and better decision-makers than human traders,”saidMark Lemley, a law professor at Stanford University who directs the university’s Law, Science and Technology program. “That may often be true, but when it’s not, or when they quickly go astray, investors want someone to blame.”

The timeline leading up to the legal battle was drawn fromfilingsto the commercial court in London where the trial is scheduled to begin nextApril. It all started over lunch at a Dubai restaurant on March 19, 2017. It was the first time 45-year-old Li, met Costa, the 49-year-old Italian who’s often known by peers in the industry as “Captain Magic.”During their meal, Costa described a robot hedge fund his company London-based Tyndaris Investments would soon offer to manage money entirely using AI, or artificial intelligence.

Developed by Austria-based AI company 42.cx,the supercomputer named K1would comb through online sources like real-time news and social media to gauge investor sentiment and make predictions on U.S. stock futures. It would then send instructions to abroker to execute trades, adjusting its strategy over time based on what it had learned.

The idea of a fully automated money manager inspired Li instantly. He met Costa for dinner three days later, saying in an e-mail beforehand that the AI fund “is exactly my kind of thing.”

Over the following months, Costa shared simulations with Li showing K1 making double-digit returns, although the two now dispute the thoroughness of the back-testing. Li eventually let K1 manage $2.5 billion—$250 million of his own cash and the rest leverage from Citigroup Inc. The plan was to double that over time.

But Li’s affection forK1 waned almost as soon as the computer started trading in late 2017. By February 2018, it was regularly losing money, including over $20 million in a single day—Feb. 14—due to a stop-loss order Li’s lawyers argue wouldn’t have been triggered if K1 was as sophisticated as Costa led him to believe.

Li is now suing Tyndaris for about $23 million for allegedly exaggerating what the supercomputer could do. Lawyers for Tyndaris, which is suing Li for $3 million in unpaid fees, deny that Costa overplayed K1’s capabilities. They say he was never guaranteed the AI strategy would make money.

Sarah McAtominey, a lawyer representing Li’s investment company that is suing Tyndaris, declined to comment on his behalf. Rob White, a spokesman for Tyndaris, declined to make Costa available for interview.

The legal battle is a sign of what’s in storeas AI is incorporated into all facets of life, from self-driving cars to virtual assistants. When the technology misfires, where the blame lies is open to interpretation. In March, U.S. criminal prosecutors let Uber Technologies Inc.off the hookfor the death of a 49-year-old pedestrian killed by one of its autonomous cars.

In the hedge fund world, pursuing AI has become a matter of necessity after years of underperformance byhuman managers. Quantitative investors—computers designed to identify and execute trades—are already popular. More rare are pure AI funds that automatically learn and improve from experience rather than being explicitly programmed.Once an AI develops a mind of its own, even its creators won’t understand why it makes the decisions it makes.

“You might be in a position where you just can’t explain why you are holding a position,”saidAnthony Todd, the co-founder of London-based Aspect Capital, which is experimenting with AI strategies before letting them invest clients’ cash. “One of our concerns about the application of machine-learning-type techniques is that you are losing any explicit hypothesis about market behavior.”

Li’s lawyers argue Costa won his trust by hyping up the qualifications of the technicians building K1’s algorithm, saying, for instance, they were involved in Deep Blue, the chess-playing computer designed by IBM Corp. that signaled the dawn of the AI era when it beat the world champion in 1997. Tyndaris declined to answer Bloomberg questions on this claim, which was made in one of Li’s more-recent filings.

Speaking to Bloomberg,42.cx founderDaniel Mattessaid none of the computer scientists advising himwere involved with Deep Blue, but one,Vladimir Arlazarov, developed a 1960s chess program in the Soviet Union known as Kaissa. He acknowledged that experience may not be entirely relevant to investing. Algorithms have gotten really goodat beating humans in games because there are clear rules that can be simulated, something stock markets decidedly lack. Arlazarov told Bloomberg thathe did give Mattes general advice but didn’t work on K1 specifically.

Inspired by a 2015 European Central Bank study measuring investor sentiment on Twitter,42.cxcreated software that could generatesentiment signals, said Mattes, who recently agreedto pay $17 million to the U.S. Securities and Exchange Commission to settle charges of defrauding investors at his mobile-payments company, Jumio Inc., earlier this decade. Whether and how to act on those signalswas up to Tyndaris, he said.

“It’s a beautiful piece of software that was written,” Mattes said by phone. “The signals we have been provided have a strong scientific foundation. I think we did a pretty decent job.I know I can detect sentiment. I’m not a trader.”

There’s a lot of back and forth in court papers over whether Li was misled about K1’s capacities. For instance, the machine generated a single trade in the morning if it deciphered a clear sentiment signal, whereas Li claims he was under the impression it would make trades at optimal times during the day. In rebuttal, Costa’s lawyers say he told Li thatbuying or selling futures based on multiple trading signals was an eventual ambition, but wouldn’t happen right away.

For days, K1 made no trades at all because it didn’t identify a strong enough trend. In one message to Costa, Li complained that K1 sat back while taking adverse movements “on the chin, hoping that it won’t strike stop loss.”A stop loss is a pre-set level at which a broker will sellto limit the damage when prices suddenly fall.

The legal battle is a sign of what’s to come as AI is incorporated into all facets of life

That’s what happened on Valentine’s Day 2018. In the morning, K1 placed an order with its broker, Goldman Sachs Group Inc., for $1.5 billion of S&P 500 futures, predicting the index would gain. It went in the opposite direction when data showed U.S.inflationhad risen more quickly than expected, triggering K1’s 1.4 percent stop-loss and leaving the fund $20.5 million poorer. But the S&P rebounded within hours, something Li’s lawyers argue shows K1’s stop-loss threshold for the day was “crude and inappropriate.’

Li claims he was told K1 would use its own “deep-learning capability” daily to determine an appropriate stop lossbased on market factors like volatility. Costa denies sayingthis and claims he told Lithe level would be set by humans.

In his interview,Mattes saidK1 wasn’t designed to decide on stop losses at all—only to generate two types of sentiment signals: a general one that Tyndaris could have used to enter a position and a dynamic one that it could haveused to exit or change a position.While Tyndaris also marketed a K1-driven fund to other investors, a spokesman declined to comment on whether the fund had ever managed money. Any reference to the supercomputer was removed from its website last month.

Investors likeMarcus Storrsay they’rewary when AI fund marketers come knocking,especially considering funds incorporating AI into their core strategy made less than half the returns of the S&P 500 in the three years to 2018, according to Eurekahedge AI Hedge Fund Index data.

“We can’t judge the codes,” said Storr, who decides on hedge fund investments for Bad Homburg, Germany-based Feri Trust GmbH. “For us it then comes down to judging the setups and research capacity.”

But what happens when autonomous chatbots are used by companies to sell products to customers? Even suing the salesperson may not be possible, addedKarishma Paroha, a London-based lawyer at Kennedys who specializes in product liability.

“Misrepresentation is about what a person said to you,” she said. “What happens when we’re not being sold to by a human?”

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Bill Gates no longer world’s second richest person. Guess who is?

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Bill Gates has never ranked lower than No. 2 in the seven-year history of the Bloomberg Billionaires Index. That run ended Tuesday when the Microsoft Corp. co-founder dropped to No. 3 behind France’s Bernard Arnault.

LVMH, Arnault’s luxury-goods maker, advanced to a record Tuesday and pushed his net worth to $107.6 billion and ahead of Gates by more than $200 million. The shares extended their gains Wednesday, rising 0.7% at 1:54 pm in Paris. Arnault has added about $39 billion to his fortune in 2019 alone, the biggest individual gain by far among the 500 people in Bloomberg’s ranking.

Arnault, 70, joined Gates and Amazon.com Inc. founder Jeff Bezos, the world’s richest person, in the most exclusive wealth club last month, when his fortune surpassed $100 billion for the first time. The trio’s collective wealth exceeds the individual market values of almost every company in the S&P 500 Index, including Walmart Inc., Exxon Mobil Corp. and Walt Disney Co.

This year has been particularly good to French tycoons, with Arnault, Kering SA’s Francois Pinault and cosmetics heir Francoise Bettencourt Meyers tacking on a combined $57 billion.

Arnault and his family are among luxury titans who pledged more than $650 million in April for the reconstruction of Notre Dame Cathedral after fire ravaged the landmark church. He controls about half of Paris-based LVMH through a family holding company and also owns a 97% stake in Christian Dior, the fashion house founded three years before his birth in 1949.

Arnault entered the luxury-goods market in 1984 by acquiring a textile group that owned Christian Dior. Four years later, he sold the company’s other businesses and used the proceeds to buy a controlling stake in LVMH. His art collection of modern and contemporary paintings includes pieces by Jean-Michel Basquiat, Damien Hirst, Maurizio Cattelan, Andy Warhol and Pablo Picasso.

Were it not for Gates’s philanthropic giving, he’d still be the world’s richest person. Gates has donated more than $35 billion to the Bill & Melinda Gates Foundation. Bezos’s net worth is up slightly this year to $125 billion, even after reaching a divorce settlement with MacKenzie Bezos that made her the world’s fourth-richest woman.

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Libra crypto won’t launch until regulatory concerns are addressed, says Facebook

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Facebook Inc said on Monday it would not proceed with the launch of its Libra cryptocurrency until regulatory concerns are addressed, as the US Treasury secretary took the unusual step of saying he had serious concerns it could be used for illicit activity.

David Marcus, who oversees Facebook’s blockchain efforts, planned to tell Congress that Libra is not being built to compete with traditional currencies or interfere with monetary policy.

“The Libra Association, which will manage the (Libra) Reserve, has no intention of competing with any sovereign currencies or entering the monetary policy arena,” Marcus was due to say on Tuesday, according to prepared testimony released by the Senate Banking Committee. “Monetary policy is properly the province of central banks.”

“Facebook will not offer the Libra digital currency until we have fully addressed regulatory concerns and received appropriate approvals,” he said.

Speaking with reporters, Mnuchin said he was not comfortable with Libra currently, particularly in guarding against money laundering and other illicit use. “They’re going to have to convince us of very high standards before they have access to the US financial system,” he said.

Mnuchin is the latest senior US regulator to air concerns with the product, days after Federal Reserve Chairman Jay Powell expressed similar worries about the digital currency could be misused.

“These cryptocurrencies have been dominated by illicit activity and speculation,” said Mnuchin.

In his prepared testimony, Marcus said the Libra Association, the companies behind the Facebook-led cryptocurrency, planned to register as a money services business with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) and fully expected to comply with anti-money laundering and Bank Secrecy Act rules.

Since announcing the Libra project last month, Facebook has faced a torrent of criticism and skepticism from policymakers across the world who cite concerns over data security, money laundering and consumer protections.

Marcus was scheduled to testify on Tuesday and Wednesday before congressional committees overseeing financial issues and several members have suggested the product be barred.

Addressing some of those concerns, Marcus said in his prepared testimony that partners providing financial services with Libra will be required to comply with anti-money laundering rules. The Libra Association will not hold personal data of users beyond basic transaction information, and personal information provided to Calibra, the digital wallet Facebook is developing to hold Libra, will not be shared with the social media company and cannot be used for targeting ads.

Marcus added that he expected the Swiss Federal Data Protection and Information commissioner to be Libra’s privacy regulator because the Libra Association is headquartered in Geneva. The association is also in preliminary talks with the Swiss Financial Markets Supervisory Authority on “an appropriate regulatory framework.”

While promising Libra will adhere to relevant laws and regulations, Marcus aimed to sell lawmakers on the product’s merits as well, arguing the United States should not stifle such innovation.

“I am proud that Facebook has initiated this effort here in the United States,” his testimony said. “I believe that if America does not lead innovation in the digital currency and payments area, others will. If we fail to act, we could soon see a digital currency controlled by others whose values are dramatically different.”

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RBI to come out with mobile app for currency notes identification

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The Reserve Bank of India will come out with a mobile application to help visually challenged people in identifying currency notes as cash still remains a dominant mode of transaction.

At present, banknotes in the denominations of Rs 10, 20, 50, 100, 200, 500 and 2,000 are in circulation, besides Re 1 notes issued by the Centre.

The RBI said that identification of banknote denomination is key to successful completion of cash-based transactions by visually impaired persons.

Intaglio printing based identification marks for helping the visually challenged in identification of banknotes denomination are present in the notes of Rs 100 and above.

After demonetisation of old Rs 500/1,000 notes in November 2016, new banknotes in design and sizes have been put in circulation.

“The Reserve Bank of India has been sensitive to the challenges faced by the visually challenged in conducting their day to day business with Indian banknotes,” said the central bank while scouting for a vendor to develop the mobile application.

The proposed mobile app would be able to identify the denomination of notes of Mahatma Gandhi Series and Mahatma Gandhi (New) series by capturing the image of the notes placed in front of mobile camera, the RBI said while inviting bids from tech firms to develop the app.

The RBI had come out with a similar ‘request for proposal’ from vendors but later cancelled it.

The app will also generate “audio notification” intimating the currency note denomination to the user if image is captured correctly, else intimating the user to try again in case of image is not readable.

There are about 80 lakh blind or visually impaired people in the country, who are likely to benefit from the initiative of the central bank.

In June, 2018 the central bank had declared that it would explore the feasibility of developing a suitable device or mechanism for aiding the visually impaired in the identification of Indian banknotes.

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