FINspeak

Strict regulations, amendments and alternate measures such as acceptance of a cheque from the accused are in place to contain insider trading. However, the question is why do such incidents keep happening? The regulators do their job by unfolding the evidences and pressing charges against the accused, but why do they fail to identify such events and take preventive measures in the first place? Insider trading happens not due to the absence of regulations but because of the oversight of existing regulations. While technology has made its advancements, the systemic loopholes have not been able to catch up with the crime.

In the wake of insider trading convictions, the need of the hour is to put the latest technology advancements to a more widespread and preventive use rather than just as a means to detect such frauds. The use of technologies such as Social Network Analysis (SNA) and Pattern Detection Technology (PDT) is slowly gaining ground in areas such as Anti Money Laundering (AML), identity theft, Denial of Service (DOS) attacks, network frauds, terrorist financing and other related financial crimes by companies in the financial services, telecom and the public sector space.

SNA tools have proven successful in insider trading cases identified by the Australian Securities & Investment Commission. SNA essentially is a "data mining technique revealing the structure and information content by representing it as a set of interconnected, linked objects or entities." Unlike other analytical techniques such as statistics, which use the notion of independence of subjects as their foundation, SNA can provide useful insights into large datasets along network, spatial and time dimensions based on the interconnectedness of the subjects being analyzed. SNA measures could involve a Circle network where in an asset has been transferred between multiple dealers (nodes) indicating a Networking Fraud ring, or a Star Network. 

Another possible way of ramping up compliance capabilities is via Pattern Detection Technology. This involves analyzing trade patterns, which is possible only with automation techniques such as PDT. While one pre-clears trading, observing the restricted lists of stocks that cannot be traded due to the access of inside information and orders on the trading desk are mandatory. In addition, one should also have a knack to look for patterns; especially identify those that may have been flagged as a conflict and look at front-running reports in order to catch abnormal patterns.

Like all good theories, thoughtful application is required to achieve the desired outcomes. Even the implementation of SNA comes with certain limitations. There is no point in reacting to a fraudulent instance after its occurrence, which makes SNA retrospective in nature. In addition, associating a transaction at runtime to SNA significantly slows transaction time, which is not in-line with today's corporate buzzword of "Zero waiting time". Further, data protection laws and regulatory measures can be a bottleneck, which could render most investigations futile as they run afoul with authorities. Then of course, there is the technical glitch of the software application that enables SNA implementation through desktop based, client-based or enterprise-level server based implementations. Organizations may opt for either flavor depending on the implementation complexity. On the other hand, the implementation of PDT also poses complexity in terms of the magnitude of data to be analyzed. Corporate politics, fear to question the senior management and the legal implications of questioning your boss definitely come in the way of PDT implementation. Even with intensive scrutiny, it boils down to a cat and mouse game, as no technology will be able to catch a tipster if he decides to meet someone at a bar or a soccer game, unless they are bugged.

As with all blessings, the modern day cyberspace (corporate web pages, bulletin boards, newsgroups and corporate e-mails) brings unwanted attention as it increases the potential to misuse inside information, thereby multiplying opportunities for liability. To err is human, which is evident as employees tend to go overboard while using these communication channels and lose sight of the possible legal implications of their actions. They are under the illusion that the modern day electronic communications are difficult to trace, whereas the "technology trail" is far easier to detect than a "paper trail".

With all said and done, it is imperative to proactively implement these technologies alongside the stringent SEC enforcements. It remains to be seen whether techno-advancements are able to deliver an impregnable system or whether another conviction reoccurs. One can only hope for the best!