The day after the Federal Reserve raised interest rates, volume was so heavy on the Nordic stock exchanges that Joakim Strid’s team of analysts identified 500 instances of possibly fraudulent trading -- and that was before lunch.
“It’s been a very busy morning,” said Strid, the head of European surveillance at Nasdaq Inc.
Strid’s Stockholm-based staff was keeping an eye on trading with Smarts, a software program Nasdaq uses to unearth suspicious behavior on 13 exchanges in Europe and the tech- driven exchanges it manages in the U.S. Alerts pop up on terminal screens that indicate possible “spoofing,” an illegal scheme in which traders drive the prices of stocks up and down with bogus buy and sell orders.
“The next step is to conclude whether it’s worthy of further investigation,” Strid said.
Nasdaq’s market technology business produced $59 million in net revenue in the third quarter, and Smarts has emerged as the No. 1 trading-surveillance player in the world at a pivotal moment for the burgeoning industry. Allegations that Navinder Singh Sarao, a 37-year-old day trader near London, contributed to the flash crash in May 2010 by spoofing the futures market is just one of a series of cases that have focused the investing world this year on a specific breed of algorithmic fraud.
With regulators pressing market participants to root out securities scams, Nasdaq and its rivals are jockeying to install the equivalent of closed-circuit TV cameras on trading platforms around the world to monitor and record every gyration that a security or a derivatives contract makes.
Cinnober Financial Technology AB, also based in Stockholm, provides market surveillance to exchanges ranging from the Frankfurt-based Deutsche Boerse to the Dubai Gold and Commodities Exchange. Vertex Analytics helps the CME Group Inc. and the Chicago Board of Trade scrutinize the futures markets. And London Stock Exchange Group Plc uses its own Millennium program to police its U.K. exchange. In 2016, the $450 million trading-surveillance market may increase as much as 10 percent, according to Aite Group, a Boston-based consulting firm.
“Every time there’s a high-profile case, there’s more spending on surveillance systems,” said Danielle Tierney, a senior analyst at Aite.
Abnormal Behavior
While regulators have long relied on whistle-blowers and spreadsheets to detect abnormal trading behavior, these methods can’t handle the firehose of data that now floods the markets. There were as many as 300 million price-quote changes on a single trading day in the U.S. stock markets in 2015, an eleven- fold jump from 2005, according to Credit Suisse Trading Strategy data. It’s easy for fraudsters to slip phony bid and ask orders into the flow, said Michael O’Brien, head of product development at Smarts.