Wall Street Cops Turn to AI for Market Surveillance

Posted on October 27, 2016 by admin

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FINRA Market Surveillance Crew Gets the “Artificial Intelligence Memo” After NASDAQ and LSE introduce AI tools to Monitor “Layering.”

(Reuters)–27 October-Artificial intelligence programs have beaten chess masters and TV quiz show champions. Next up: stock market cheats.

Two exchange operators have announced plans to launch artificial intelligence tools for market surveillance in the coming months and officials at a Wall Street regulator tell Reuters they are not far behind. Executives are hoping computers with humanoid wit can help mere mortals catch misbehavior more quickly.

The software could, for instance, scrub chat-room messages to detect dubious bragging or back slapping around the time of a big trade. It could also more quickly unravel complex issues, like “layering,” where orders are rapidly sent to exchanges and then canceled to artificially move a stock price.

A.I. may even sniff out new types of chicanery, said Tom Gira, executive vice president for market regulation at the Financial Industry Regulatory Authority (FINRA).

“The biggest concern we have is that there is some manipulative scheme that we are not even aware of,” he told Reuters. “It seems like these tools have the potential to give us a better window into the market for those types of scenarios.”

FINRA plans to test artificial intelligence software being developed in-house for surveillance next year, while Nasdaq Inc (NDAQ.O) and the London Stock Exchange Group (LSE.L) expect to use it by year-end.

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The exchange operators also plan to sell the technology to banks and fund managers, so that they can monitor their traders.

Artificial intelligence is the notion that computers can imitate nuanced human behavior, like understanding language, solving puzzles or even diagnosing diseases. It has been in development since the 1950s and is now used in some mainstream ways, like Siri, an application on Apple Inc’s (AAPL.O) iPhone that can engage in conversation and perform tasks.

While financial firms are already applying artificial intelligence software for everything from compliance to stock-picking, it is only starting to become useful for market oversight.

“We haven’t really let the machines loose, as it were, on the surveillance side,” said Bill Nosal, a Nasdaq business development executive who is overseeing its artificial intelligence effort.

50 BILLION EVENTS

Market surveillance generally relies on algorithms to detect patterns in trading data that may signal manipulation and prompt staff to investigate.

But the sheer volume of data can lead to an overwhelming number of alerts, many of which are false alarms.

FINRA monitors roughly 50 billion market “events” a day, including stock orders, modifications, cancellations and trades. It looks for around 270 patterns to uncover potential rule violations. It would not say how many events are flagged, or how many of those yield evidence of misbehavior.

The “machine learning” software it is developing will be able to look beyond those set patterns and understand which situations truly warrant red flags, said Gira.

Machine learning is a subset of artificial intelligence in which computers figure out new tasks without having been programmed to do so. In the case of market surveillance, that would mean the computers “learn” which trading patterns lead to enforcement charges, in order to flag the right ones.

FINRA plans to test the new tool next year alongside its existing systems to compare the results.

The regulator has already moved its surveillance systems to Amazon.com Inc’s (AMZN.O) web-based Cloud, giving it more computing power to quickly analyze massive data.

Nasdaq is working with cognitive computing firm Digital Reasoning, which it invested in earlier this year.

LSE has teamed up with International Business Machine Corp’s (IBM.N) Watson business and cyber-security firm SparkCognition to develop its A.I.-enhanced surveillance, Chris Corrado, chief operating officer of LSE Group, told Reuters in an interview. Watson has become something of a household name, having bested contestants in the game show “Jeopardy” in 2011.

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Pershing Square Will List Permanent Capital Vehicle This Year

Posted on August 14, 2014 by admin

BrokerDealer.com blog post courtesy of extract from FinAlternatives.com

Pershing Square Capital Management plans to move forward with a listed permanent capital vehicle later this year, the $15 billion hedge fund told investors.

The New York-based firm said it will raise an undisclosed amount in an initial public offering later this year. The money would serve to protect Pershing Square’s investments against redemptions.

“Because we are an active, control and influence-oriented investor, we have avoided being fully invested because of the risk of investor redemptions,” firm founder William Ackman wrote. “We will hopefully begin to address this issue with the initial public offering of Pershing Square Holdings Ltd., targeted for later this year, which will increase the amount of our capital that is permanent.” Continue reading →

Barclays Bank Common Shares Walk Back 6% After Fraud Charges Filed By NY Attorney General

Posted on June 27, 2014 by admin

Image Courtesy of BBC News

Shares in UK’s Barclays Bank fell as much as 10% and closed 6% lower today on the London Stock Exchange, after New York Attorney General Eric Schneiderman filed criminal charges against the bank in connection with the brokerdealer’s “dark trading pool, ” one of the financial market’s largest electronic trading platforms whose business model is to provide black box order matching for large block trades. New York’s top cop has accused Barclays of fraud, including allegations of misrepresentations made to clients of the bank, including the world’s largest investment managers.

In addition to heavy selling in the company’s shares, Barclays was forced to postpone the floating of a $1billion debt issue, whose proceeds were intended to retire outstanding debt issued at higher interest rates, and other purposes that include conforming to new capital rules imposed on investment bank/brokerdealers throughout the global financial markets

Per reporting from the BBC:

Prosecutors said Barclays misrepresented the kinds of investors that were using the dark pool. They said the bank claimed the pool was closed to aggressive traders, but in reality it was not.

They also said the bank had misled ordinary investors by claiming it would use a stock exchange or dark pool that “would best execute their trades” at any given time, but in fact the trades were “nearly always” routed to Barclays’ own dark pool so the bank could make more money.

The world’s major stock markets, such as the London and New York Stock Exchanges, are known as light markets, as they are highly transparent and regulated.

Dark pools are private markets set up by banks that are less transparent and so are not open to the same levels of scrutiny.

New York attorney general Eric Schneiderman said: “The facts alleged in our complaint show that Barclays demonstrated a disturbing disregard for its investors in a systematic pattern of fraud and deceit.”

“Barclays grew its dark pool by telling investors they were diving into safe waters. According to the lawsuit, Barclays’ dark pool was full of predators – there at Barclays’ invitation,” he said.

The complaint details “a flagrant pattern of fraud, deception and dishonesty with Barclays clients and the investing public,” he added.

Mr Schneiderman said presentations made by Barclays were “demonstrably false”. He read out some of the emails cited in the complaint. One, from a vice-president of sales, said: “I always like the idea we are being transparent, but happy to take liberties if we can all agree.”