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The Trading Mesh

Pillar #6 of Market Surveillance 2.0: Known and unknown threats

Thu, 02 Apr 2015 06:57:08 GMT           

 

By Theo Hildyard

 

In the sixth blog in our series outlining the Seven Pillars of Market Surveillance 2.0, we look at how support for identifying threats – both known and unknown — can help to alleviate the Next Big Problem in capital markets. 

 

Market Surveillance 2.0 can not only spot known threats before they happen - such as flash crashes, fat finger trades, insider dealing and benchmark fixing - but can also help to pinpoint any unknown threats which could become the next Black Swan event. For it is the great unknown events -- which could be caused by traders, algorithms, or even cyber-terrorism activities -- that keep capital markets players and watchdogs awake at night. 

Monitoring for unknowns can be achieved by benchmarking behavior that is “normal” over time and then spotting behavior that deviates from the norm. To spot suspicious behavior could involve digitally monitoring the locations and in-person interactions of traders — their speech and facial expressions for example. Cyber-terrorism is on the upswing and algorithmic terrorism, where a well-funded criminal or terrorist organization causes a major market crisis, could be the next iteration. Only by keeping a close watch on the markets and the participants involved can these unwanted behaviors be nipped in the bud. 

Trader behavior is one example: if a trader converses via instant messaging with a trader she doesn’t usually speak to and this is followed by trading an unusually large trade in a stock she doesn’t usually trade and it comes just before a market moving news event that raises the value by 35%, you would want to see a “potential unusual behavior” alert. Your trader could be getting some inside information. 

The same goes for benchmarking normal behaviors in data. For instance, if you are trading in a dark pool and there are an abnormal number of cancelled buy orders for a particular share taking place, and the share company is about to release its earnings, you would also want to see an alert. A predator trading company could be testing the waters to see if anyone bites; taking advantage of pre-release jitters, or, again, maybe some insider knowledge. 

In my last blog, Pillar #5 we discussed how cross border surveillance becomes increasingly critical as trade grows more global and disparate regulatory regimes can create confusion and opportunities for error. In combining Pillar #6 with the first 5 Pillars we achieve monitoring and surveillance in behavior, geographies, asset classes, social media and communications, real-time and historical data, and we converge previously siloed systems to create a single view of risks and opportunities. 

This brings us very close to achieving Market Surveillance 2.0 – the next generation crystal ball that can help us to see the early warning signs of unwanted human or technological behaviors that signal error or fraud. Pillar #7 completes this goal; stay tuned. 

 

To find out more, download the full whitepaper here

 

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