Taking Stock
Oracle-Based Knowledge System Helps Detect Securities Fraud
By Michael Miley
...Assisting NASD Regulation in investigating market violations is a surveillance tool called the Advanced Detection System (ADS), a set of knowledge-discovery and data-mining tools developed with the help of Oracle partner SRA International (www.sra.com), in cooperation with Sequent Computer Systems (www.sequent.com), and Oracle Corporation. ADS helps analysts detect "breaks" in normal trading patterns. ...
"ADS is a pattern-matching application, with specific templates, if you will, of what a violation might look like," explains Ted Senator, manager of the KDD Group. "An if/then rule matcher searches for multiples of a set of conditions--such as many instances of a particular kind of activity--and a time-sequence matcher looks for a triggering event. Based on that event, the sequence matcher looks for other related events and sequences--either forward or backward in time--that indicate that a particular violation may have occurred."
For example, specific types of transaction patterns between brokerage firms and their customers could indicate that investors did not get the best prices possible. In addition, data-mining algorithms are used to help discover previously unencountered patterns of potential regulatory interest, such as a large number of trades marked late.
Detecting Patterns
ADS currently comprises three domains, or applications--Late Trade Reporting, Market Integrity, and Best Execution--with five to ten detection patterns for each. These applications are applied weekly to the accumulated data, after which the breaks are presented to analysts for review via a system of notifications and alerts. While the majority of the breaks do not indicate any violation, some alerts do lead to further investigation. "A late-trade violation, for example, would involve marking a trade late when it, in fact, is not," explains Senator. "A market-integrity violation might be a coordinated attempt to keep the price of a security at a certain level. A violation of the best-execution rules might involve a trade in which a customer who is selling receives a price less than what somebody else was willing to pay at the time of the sale."
Market-regulation analysts review all breaks generated by the system. After the break is reviewed to see if a violation has in fact occurred, it's either closed out, an investigation is initiated, or other appropriate sanctions are imposed. ...
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