ASIC's real-time war on fraud

White collar fraudsters will have far fewer tricks up their sleeve from the end of this month when analysts at Australia’s market regulator begin relying on a new real-time market surveillance system

The Australian Securities and Investment Commission (ASIC), armed with a mandate to monitor and crack down on fraud on the country’s trading platforms, is in the middle of a $43 million systems refresh that targets insider trading loopholes and other criminal activities in the stock market.

In time, the systems being implemented will also help ASIC warn brokers when their clients’ accounts have been hacked - a form of fraud that has escalated in recent years.

ASIC was charged in August 2010 with regulating Australia’s  financial trading market after alternate exchanges were licensed to provide competition to the Australian Stock Exchange.

The regulator has used a Nasdaq OMX/SMARTS monitoring system to monitor the ASX, Chi-X and other smaller exchanges in the three years since. ASIC viewed the SMARTS system as "proven, low-risk technology" it could use to develop a monitoring capability before going back to the market for a “more sophisticated, higher capacity solution”.

Over the last four years, ASIC has taken traders to court on 28 occasions. Greg Yanco, senior executive leader of ASIC’s market and supervision participation team, told iTnews that “many of the matters we’ve enforced were generated by alerts out of SMARTS”.

But ASIC still has a long way to go to identify the more complex insider trading matters. The four-year Enhanced Market Supervision (EMS) program plans to tackle fraud using a mix of real-time alerts or deeper pattern analysis.

In December 2012 the regulator announced the first stage of the EMS program would be a new market monitoring system supplied by First Derivatives. ASIC’s IT team has spent the intervening months implementing the First Derivatives DELTA solution on HP x86 servers (running a mix of Windows Server and Red Hat Linux). The application now sits on most analysts’ desks at ASIC in parallel with the SMARTS system. There are only a few minor interface adjustments to be coded before the SMARTS system can be switched off.

Yanco expects the new First Derivatives system to be in production before the end of this quarter. The new system provides ASIC more flexibility in terms of producing alerts - be they real-time alarms or batch reports, he said.

The new system will, for example, allow ASIC to determine whether a broker’s system has been hacked. In 2012, the regulator warned brokers over a dozen incidents involving hackers accessing client accounts and making fraudulent transactions.

While ASIC has had some moderate success catching these incidents, the regulator will have far better insights with the new system. Alerts can be set up so that, for example, the moment a client appears to be making one or more highly unprofitable trades that make no strategic sense, an alarm can be triggered for ASIC and, in turn the brokers, to investigate.

The new system also gives ASIC the opportunity to monitor both the equities market and the futures market in real-time, with an ability to analyse relationships between the two that might suggest fraudulent activity.

At present, futures trading is monitored on a T+1 process - that is, the trades are compared to regular share trading one day after the transactions are completed. By the end of the EMS project, ASIC should be able to monitor both in real-time.

Yanco said fraudsters would be far more likely caught when engaging in cross-market manipulation between equities trading and futures contracts if ASIC could see disparities between an index, futures and the stock in real-time.

To some degree, cracking down on manipulation between markets will require ASIC to develop a capability to identify clients no matter who they are doing trades through or what kind of trades they are conducting. It would be helpful, Yanco noted, if there was a ‘global legal entity identifier’ with a built-in hierarchy that revealed the relationships between, lets say, the Acme Group as a legal entity and Acme Asset Management as a related legal entity.

The trading industry may come up with its own solution soon enough. Investment banks the world over have seen a requirement for identifiers - The US Depository Trust & Clearing Corporation (DTCC) and the Australian Financial Markets Association are two such industry groups driving this agenda forward.

Over the next three years, ASIC will make a series of technology investments to complement and enhance the new market monitoring system, but already the project has seen some gains - at least in terms of speeds and feeds.

One analyst has reported to Yanco that a batch process that once ran overnight took six seconds on the new system.

“We’re dealing with a supplier that is used throughout the algorithmic trading world – the speed of analytics is their bread-and-butter,” Yanco said. “So we’ll have a capability to keep up with those driving the stockmarket.”

Indeed, while ASIC’s technology funding appears handsome on paper and its new systems bring it on par with other regulators overseas, the total project spend pales in comparison to the technology spend of those organisations it is charged with regulating.

“Compared to what others are spending, that amount is not enormous, but it is enough to give us the capability to keep up with the traders.”