Kx Product Insights: Insider Trading Alert

4 Apr 2019 | , ,
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By Rita Donovan

Kx has a broad list of products and solutions built on the time-series database platform kdb+ that capitalize on its high-performance capabilities when analyzing very large datasets.

Kx for Surveillance is a robust platform widely used by financial institutions for monitoring trades for regulatory compliance. The Surveillance platform instantly detects known trading violations like layering, spoofing or marking the close. Customers can calibrate their parameters in real time to improve their detection quality and accuracy. The flexibility of the historical database and replay engine eases retrospective investigation for new types of fraudulent behavior and suspicious activity.

In this series, we take a look at what makes Kx for Surveillance such a powerful tool for detecting market manipulation. This article discusses the Insider Trading alert. 

 

Insider Trading refers to trading in a public company’s stock, based on information which has not been made available to the general public.

Of all the types of market manipulation and abuse which the Kx for Surveillance platform helps to identify and facilitate investigation of, Insider Trading is probably the most commonly known practice, mainly due to media coverage of famous instances, and its portrayal and glamorizing by Hollywood. However, it is a little publicized fact that not all instances of insider trading are, in fact, illegal.  Insider Trading can be legal, but only when it is conducted by the directors of a company when purchasing or selling shares, and when these transactions are legally disclosed. Nonetheless, as a general rule of thumb, insider dealing is usually illegal whilst information remains unavailable to the general public. As one might expect, this is an area subject to heavy regulation, and the punishments which individuals and/or organizations found guilty of insider dealing may be subjected to are significant.

There have been a number of high profile cases of insider trading which have come to public attention in recent years. It is ironic that one of the most infamous of these may possibly that of celebrity business woman Martha Stewart, who was charged with insider trading and brought to trial in 2004 but was ultimately found not guilty (though served time for several lesser offences). Nonetheless, the case is what often comes to mind when one hears mention of insider trading.

Whilst other forms of market abuse had, for many years, flown ‘under the radar’ so to speak, and were not subject to the stringent regulations we see today, insider trading is a practice which has historically always been tightly regulated.

The recent introduction of MiFID II has brought with it the most challenging body of regulation yet to hit the financial sector. Whilst in the United States, insider trading and its regulation focuses on the buy side and violation of fiduciary duty, the European Union has taken a somewhat different approach, prohibiting those in possession of insider information from dealing in related securities, and prohibiting traders from disclosing information to third parties unless it is within the normal course of their duties[1]. Therefore, firms which operate within jurisdictions subject to EU regulation have stringent obligations when it comes to upholding regulatory requirements, making surveillance software such as the Kx for Surveillance platform indispensable.

As can be seen in the screenshot above, the Kx for Surveillance platform identifies potential instances of insider trading through the use of a series of benchmarks, calibrated to pick up on suspicious trading activity conducted prior to significant market events. Essentially, the baseline or ‘normal’ interest in a given product is observed, and when a trader expresses an interest which significantly exceeds the norm, this will trigger an alert if it is coupled with a large change in the value of the given asset which is advantageous to the trader.  These instances can then be subjected to further investigation by compliance officers and surveillance analysts. This is facilitated by a series of investigation dashboards and market data compiled by the Kx for Surveillance platform, enabling in-depth, end-to-end monitoring and enquiry.

Given increasingly stringent regulatory requirements, it is no exaggeration to say that Surveillance tools have become an integral part of the day-to-day functioning of any compliant modern financial institution. Given its reliability, adaptability and accuracy,  Kx for Surveillance is indispensable to any such organization, affording both the confidence and security that any investigation will both meet and exceed regulatory requirements and changes.

[1] https://business.nasdaq.com/marketinsite/2017/How-to-Monitor-for-Insider-Trading.html

For more information on Kx for Surveillance and its functionality please click on the links below

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