James Rundle: Patterns of Behavior

james-rundle
James Rundle, Waters

There’s been no shortage of fraud and market abuse scandals over the last 12 months across the sell side. From rate-fixing to huge losses from derivatives bets gone wrong, the reputation of the financial services industry has taken a beating, and it has paid enormous penalties, accordingly. Much of the damning evidence, particularly with the London Interbank Offered Rate (Libor) affair, has come from communications transcripts, where traders have openly discussed ways to manipulate benchmarks.

The question that I keep asking myself is: Why? That’s not referring to the motivations behind the crimes, or how they were allowed to take place—those are simple enough. What’s kept me thinking is why does this evidence even exist in the first place? It’s a routine fact in the industry that communications are recorded. Indeed, given recent revelations about the activities of the US and UK governments, it would seem that most communications are recorded. So why are people discussing these things on monitored mediums, knowing full well that everything they say is being taken down and stored?

Modus Operandi
The simple answer, of course, is that it’s easy to forget. People often say that the knowledge that you’re being watched  inevitably changes the way you do things, but it’s just not true. How many people read the IT agreements when they join a company that prohibit any personal use of the firm’s systems, where it says that activity is monitored, yet check their Facebook and personal email anyway? It’s not in our nature, as people, to behave in prescribed ways, but it is very much in our nature to believe that while things may be monitored, we’d never get picked up. Recently, certain people in the industry have found this to be very wrong.

Regardless of individual behavior, the various episodes of malfeasance at financial institutions have highlighted another issue within banks and brokers. Outside of the act of fraud itself, the fact that communications are digitized and stored should, in theory, make it relatively simple to pick up on these things internally, before media reports and regulatory action make them impossible to avoid. Rather than questions of attitude, and other esoteric, existential lines of inquiry, the culture of technology in compliance should be questioned.

After all, detecting and preventing fraud like this should be a question of connecting the data dots. I accept that it’s a little more complicated than that, but given the kinds of scandals from Libor, or insider trading, that have plagued the financial sector recently, it’s surprising that compliance departments at large firms are still using broadly manual processes to sort through records and data. How many times can certain keywords appear in communications, from people responsible for clearly exaggerated submissions, for instance, before someone picks up on it? Indefinitely, if those communications aren’t being properly monitored, or linked with relevant data.

Rather than questions of attitude, and other esoteric, existential lines of inquiry, the culture of technology in compliance should be questioned.

Complex Event Prevention
I speak to a lot of people about big data, the use of complex-event processing (CEP) technology, analytics and other areas. There’s a lot of discussion about how these can be accurately and efficiently applied to the compliance process, now, in taking small, unstructured pieces of information and intelligently analyzing the links between them to build a picture of potential problems as they occur.

This is a truly innovative use of technology in the markets. Orwellian references are easy to trot out when it comes to discussing surveillance, but taking big-data disciplines and applying them to fraud and market abuse fulfills a basic responsibility on the part of market participants, exchanges and vendors—the operation of an efficient, orderly market. Given the financial and reputational damage that’s occurred under what appear to be tired, out-of-date regimes, not pursuing these avenues is an approach that the sell side can ill afford at present.

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