Big Brother is [Not] Watching You

I rarely click on banner ads. But one from these folk aroused a morbid curiosity in yours truly that caused me to override my normal reticence. For those not wanting to click through and read in detail, it was a teaser for market surveillance software to flag less-than-salubrious activities of traders, one's customer's, PMs and one would imagine, those with capital commitment authority unable to withstand the temptation of cheating for wanton egotistical pleasure, or more likely, parochial financial gain.

It describes itself as a highly configurable software compliance module that will detect market manipulation including (but not limited to):

Pre-arranged trades
Wash trades
Naked short sales
Cancellations
Marking the close
Price jump and significant position
Phantom orders
High volume and price jump
Painting the tape
Spoofing
Concealing ownership
Price jump with following reverse price jump
Reference price manipulation
Late trading and deal capture

Wow, and hello Andy DuFresne!

This perhaps raises some interesting questions. For example: What does it say about an organization that feels this is necessary to deploy? Although, one believe it the expression of a zero-tolerance policy, might it also imply that the owners or management - perhaps the management upon which the reputation of the organization was built - is now too-distant from the trenches to know when a PM or strategy manager is marking his book or doing impact trades at investor expense? Or perhaps that management is too thin on the ground (or inexperienced or ill-informed) to oversee or even know malfeasance when they witnesses it. "Good on yer matey - that stock you bought has doubled (no matter you bought 25% of the float at higher and higher prices and now own three months volume..."). Of course the managers could also be knowing and in complicity (or more insidiously, orchestrating) begging the question is there a management compliance module to detect such behaviours?

Indeed, I may mistaken in believing such software may be intended for the humble hedge fund (though one wonders what if any alarms would have been sounded over RajRat's Galleon, or what might be caught in its driftnet were it cast over SAC's trade histories) but rather it has been built for the large IB, or industrial money manager. But even here, one wonders whether a sweep of Fidelity or, say, Cap Research would yield unsavouriness relating to "price-jump and significant position", "marking the close", or "concealing ownership". Or, more interestingly, what their opinion would be of implementing compliance software that claimed the ability to red-flag such unvirtuous behaviours. Methinks they would feign insult and dismiss it as ridiculuous that such things might be associated with their venerable names. "Gambling....here? I am shocked...."

There are some obvious holes in their malfeasance suite: old-fashioned insider trading; trading upon material non-public information (e.g. GLG & Sumi CBs and front-running of equity inssuance), predatory trading (e.g. Citadel/JPM vs Amaranth; GLG vs Eifuku, or any number of Red-D private CBs or convertible prefs); stock cornering (e.g. Porsche); regulatory loopholing (opaqueness of OTC reporting), stock parking and collusive trading, to name a few from a list which is certainly not exhaustive.

This begs the most obvious question: If it well and truly "works", why don't the regulatory authorities, exchanges, and self-regulatory organizations license it and blue-sky the results? Name and shame might be a useful addition to the regulatory arsenal. For shame and ultimate reputational risk (next to prison resulting from enforcement and prosecution) is a powerful deterrent, but only it is only a deterrent if transparency and subsequent enforcement prevails.