Regulators Use Artificial Intelligence in Trading Hunt
During the past two weeks, market regulators across the world have been scanning their market surveillance systems for evidence of investors making financial gains from the attacks on the World Trade Center and the Pentagon. Their interest lies in irregular trading which appears to have been done with prior knowledge of a resulting drop in airline and hotel stocks, in the hope that suspicious activity would provide leads to terrorists.
These investigations have raised two important questions: do the financial markets have a role to play in identifying extremist political groups which are trying to fund their regimes? If they do, what role does artificial intelligence play in identifying such activity and locating who is involved?
Stock exchanges already use artificial intelligence to monitor trading on their markets and to identify market abuse and insider trading. Such systems tend to monitor only the asset class traded on that exchange rather than cross-monitoring trading in commodities, equities and foreign exchange, for example. They also exclude over-the-counter trading - a route more likely to be taken for anyone trying to cover their tracks.
However, regulators aim to monitor across different exchanges, using market intelligence together with scanning techniques and artificial intelligence to spot irregularities. Gay Huey-Evans, director of markets and exchanges at the Financial Services Authority, which regulates and monitors the UK market, says that no evidence of similar trading has been found in the UK. She is confident that the FSA would have been able to spot the suspicious trading believed by some to be linked to terrorist groups.
She says: "Our regulatory code doesn't just cover those who deal in shares, but those who trade on any of the UK's eight exchanges. This means that equities, commodities and other asset classes are monitored. The FSA has trained most of its market supervisors in the use of transaction monitoring equipment and techniques. They are specialised, highly trained monitors of all the markets in London."
The FSA uses a technique known as Sabre to follow the market. All data recorded from individual exchanges is fed into a data repository at the FSA. The system alerts the surveillance team when it finds irregularities. "It could have spotted irregular short selling," says Huey-Evans.
Phil Erlanger's company, Erlangersqueezeplay.com, has developed technology to follow puts and calls and short selling on stocks to identify market opportunities for clients. Erlanger was monitoring the markets in the weeks and months leading up to the terrorists attacks on New York and Washington.
"After the attack I looked at the historical data for companies such as American Airlines and Hilton Hotels. …