Mr Aitken, who heads the government-funded Capital Markets Cooperative Research Centre (CMCRC), said he has “lost track” of the number of times he has listened to presentations by technology providers “entreating the audience to believe that their technology is the answer to all the problems in surveillance”.
“Markets are currently spoilt for choice on surveillance technology, with no less than five major vendors and a wide array of array of ancillary providers,” he said.
But arguments in favour of ‘this or that’ technology provider are putting the cart before the horse, he said.
“All discussions of market surveillance need to start with ‘what data is available to go into the technology in the first place?’,” Mr Aitken stated.
“If you can’t identify the person behind an order or a trade, there’s little chance you’ll be successful in identifying insider trading or market manipulation – irrespective of what technology vendor you use.”
This is likely to be the reason behind the prevalence of “false positives” within surveillance systems today, said Mr Aitken.
“In turn, this explains why regulators are often gun-shy about going to brokers to ask for client-level data because so many leads turn out to be false positives,” he said. “And conviction rates are lower, which leads to criticism of regulatory performance and a lack of confidence in the system generally.”
One glaring problem that affects Australian surveillance systems is the fact that stockbrokers are not required to identify when they are trading as a principal or an agent, he said.
This kind of data is vital for regulators to be able to determine whether brokers are ‘front running’ (that is, buying or selling stocks for their own benefit before placing very large orders for clients).
“In short, then, there is currently far too much emphasis on surveillance technology and not enough emphasis on securing the right data for the surveillance task,” said Mr Aitken.
Indeed, technology developed 20 years ago could be doing a much better job than existing systems if the appropriate data was available, he added.
“However, the good news is that things are changing. As an example, from October 2014, ASIC will require client identifiers on all orders and meaningful information on when brokers are trading as principal or agent,” Mr Aitken said.
“Given that integrity-challenged individuals engaged in these pursuits are unlikely to know of these changes, I predict that 12 months on from these changes the number of cases of market infractions identified rise precipitously in Australia,” he said.
“This is not because there has been any change in the number of incidents – or the purchase of new technology – but because of the ability to identify market infractions will be much improved as a result of this new data.”
