By Mark Seaver
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 manipulative practice called “Parking”.
Parking can be defined as the illegal practice of selling shares to another party with the understanding that the original owner or broker will purchase those shares back after a relatively short period of time. One of the primary reasons why institutions or individuals engage in stock parking is to reduce their position in disclosure periods in order to appear compliant with regulator guidelines. Stock parking is also sometimes referred to as “warehousing”.
As such activity undermines the integrity of the market, authorities and exchanges such as the SEC have categorized it as an area of market manipulation. As a result, to reassure investors of the fairness of markets, there is strict scrutiny around the practice and conviction can lead to industry disbarment and significant fines. For example, in 2014 the SEC found two Wall Street traders guilty of a fraudulent parking scheme in which securities were temporarily placed in the other’s trading book to avoid penalties that would affect their year-end bonus (US Securities and Exchange Commission, 2014 [1]).
KX for Surveillance provides Parking investigation alert tools and an investigation screen to help identify individuals or syndicates who trade contracts and related instruments frequently, with no meaningful change in beneficial ownership. In the case of a buy trade, for example, the alert logic will calculate an entity’s total buy quantity within a pre-defined period and compare it with the entity’s total sell quantity for a corresponding period. The platform will then benchmark both against historical records and an alert will be triggered when pre-defined limits are exceeded.
This is illustrated in the screenshot above, where we can see the trade under investigation does not go through a significant change of ownership, is within the regulated reporting threshold, yet exceeds a separately defined monitoring threshold. When an alert is fired, the KX for Surveillance platform allows users to investigate when and why an alert was triggered. Authorized users can conduct informed investigations using benchmarking and historical trade data captured by the system. Surrounding market and eComms information can also be taken into consideration to help determine the true motivation, insidious or otherwise.
KX for Surveillance, underpinned by the kdb+ database, has been widely adopted within the financial services industry to instantly detect and analyze the many trading violations. The platform facilitates granular analysis of every individual event in real time in order to calculate and investigate the benchmarked data. Through KX’s flexible surveillance platform, benchmarks and thresholds can be pre-defined, reset, and adjusted to ensure their relevance and accuracy.
For more information on KX for Surveillance and its functionality please click on the link below.
[1] https://www.sec.gov/news/press-release/2014-24
