by Liam McNamee
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 analysing 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 behaviour 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 how it can be used to detect Wash Trades.
Wash trading is a market manipulation technique in which a trader or investor simultaneously buys and sells the same financial instrument in order to artificially boost trading volumes and create the false impression that the stock is more active than it actually is. The increased activity draws other traders into the market thereby creating larger trading volumes in the stock and consolidating the (unfounded) momentum.
Wash trades are sometimes executed by traders and brokers operating in collusion or may be executed by investors in isolation, acting as both the buyer and the seller of the security. Aside from the opportunities for traders to profit from the short-term price fluctuations it may cause, benefits from increased trading volumes can include reduced transaction costs, rebates or generating commission fees for brokers to reward them for activities for which they could not otherwise be directly compensated. One such instance of wash trading was revealed during the Libor scandal of 2012[i].
Regulators are clamping down on the practice. Bloomberg reported in May 2018 that the US Justice Department had opened a criminal probe into suspected illegal practices in crypto markets, including wash trades[ii]. In a report in September, New York’s attorney general expressed similar concerns about its increasing usage[iii].
KX for Surveillance provides a comprehensive solution for detecting and investigating wash trading as illustrated in the screenshot below.
Trade prices are plotted on the Y-axis against trade times on the X axis. The logic builds a “Wash Trade Time Window” of user-configurable length within a pre-defined time-period. Buys are denoted by the green dots and sells by the red dots. It can be seen that the colluding parties are buying and selling at a particular point and then reversing their positions very shortly afterwards.
The “Trade Volume” graph shows that there is no net change in the traders’ positions despite the increased market activity. The trades have been executed with no actual net beneficial change in interest or risk. The motivation may simply have been, to generate commission fees for brokers, as mentioned above, in return for services previously rendered.
Alerts are triggered when specific threshold criteria are exceeded and are typically set against percentage threshold measures, but they may depend on other factors including previously triggered alerts. For example, a possible wash trade may be detected if an entity executes a certain number of buys and a certain number of sells for a particular scenario but other factors taken into account may include counterparties, brokers, time intervals and net trade quantity percentages. Flexibility in configuring thresholds and alert severity levels enable users to minimise false positives.
KX for Surveillance gives brokers and regulators the ability to monitor, detect and alert on wash trading activity in multi-asset, multi-product environments. It supports three types of wash trade detection:
- Counterparty wash trades – applies to OTC trading
- Venue (Broker) wash trades- applies to OTC trading
- Venue (Exchange) wash trades – applies to Exchange Trading
The platform, underpinned by the kdb+ database, facilitates granular analysis of every individual event in real time in order to calculate benchmark data against which Wash Trading and other malpractices may be detected.
[i] https://www.risk.net/regulation/2412989/libor-trial-hears-of-bribe-wash-trades-as-lehman-failed
[ii] https://www.bloomberg.com/news/articles/2018-05-24/bitcoin-manipulation-is-said-to-be-focus-of-u-s-criminal-probe
[iii] https://ag.ny.gov/sites/default/files/vmii_report.pdf
For more information on KX for Surveillance and its functionality please click on the links below.
