Trader bad behaviour database aims to stop rogue traders pre-emptively
YOU’RE young and want to get ahead. First in and last out of your Wall Street office. You work weekends and message colleagues with inspired trading ideas at all hours. Guess what? You’ve just marked yourself as a potential rogue trader.
Welcome to the brave new world of trader surveillance, where former Goldman Sachs research analyst Erkin Adylov is building a library of banking villainy based on the behaviours of hundreds of past miscreants such as UBS Group’s Tom Hayes and Societe Generale’s Jerome Kerviel.
Using thousands of inputs, from stress levels in voice recordings to the frequency of visits to the staff canteen, Adylov and his team at startup Behavox grade employees on how likely they are to go bad before they do anything wrong.
While that may sound like something out of a Philip K. Dick science-fiction novel, hedge fund Marshall Wace and interdealer broker TP ICAP are already using the software to monitor employees, and some of the biggest investment banks and commodities dealers in the world have begun testing it.
After paying fines of more than US$ 200 billion in the past eight years for a catalogue of failings from money laundering to market manipulation and terrorist financing, banks are looking to companies like Behavox to keep them out of regulators’ crosshairs.
“If you don’t know what your employees are doing, then you’re vulnerable,” Adylov, a 33-year- old rail-thin native of Kyrgyzstan, says in the rapid staccato typical of traders for whom a wasted second is a lost opportunity. “Some banks don’t seem to want to know how exposed they are, and they are the ones who are going to get fined next.”
Under scrutiny like never before, finance firms are spending as much as one-fifth of their revenue on compliance, hiring tens of thousands of investigators, out- of-work traders and former intelligence officers to sift through employee communications. It’s not just the threat of fines that’s motivating them: Under new rules that came into effect in March, senior managers in the UK can be held accountable for the actions of their underlings and even face jail sentences.
Behavox uses machine learning, also known as artificial intelligence, to scrutinise every aspect of an employee’s working life. The technology enables computers to teach themselves how to collate and analyse huge volumes of data. Behavox scans petabytes of data, flagging anything that deviates from the norm for further investigation. That could be something as seemingly innocuous as shouting on a phone call, accessing a work computer in the middle of the night, or visiting the restroom more than colleagues. The system checks these behaviours against case studies of past traders who have strayed from the straight and narrow and looks for a match.
While other companies use similar technology to watchdog trading floors, Behavox takes it one step further, compiling a central repository of behavioral patterns accessible to all clients. Adylov calls it the Conduct Risk Exchange. His challenge is to persuade firms to share potentially embarrassing details about their inner workings. If he can build a network big enough – more than the three companies that have signed up so far – it could change the way banks police themselves.
“With this system, users benefit from eyes and ears across the industry and the behaviours that are being spotted and fed into it,” says Conor Kiernan, chief technology officer at Marshall Wace, a US$ 28.5 billion alternative asset-management company based in London.
“It really doesn’t pay to be insular when it comes to compliance.”
There are signs larger lenders are loosening up. Barclays, HSBC Holdings and other major European banks last year formed the Cyber Defence Alliance to pool information about hacking attacks.
Still, it may not be easy for an untested entrepreneur to sell Goldman Sachs on the idea of trusting him with something as critical as compliance. — WPBloomberg