Whether their employees are momentum, technical, fundamental or swing traders, it is the responsibility of every trading firm to ensure their traders are not engaging in insider trading. We broached this subject last week when we talked about the film Ocean's 11.
The efficient market hypothesis relies on the idea that investment markets are only effective when investors have access to the same information at the same time. Investors who analyze well earn well and don’t need to manipulate the system to succeed.
By knowing the time- – and by this I mean nearly to the millisecond – of delivery of press releases to and from all the major exchanges allows one customer in particular to map this information to the trading history of their staff. In this fashion, they can identify when a trade or a sequence of trades appears to suspiciously anticipate a regulatory release.
With many traders, this kind of anticipatory trade comes from hard work, a broad understanding of market trends and keen insight into a specific security. With some, though, it could signify access to insider knowledge. For our customer, it can throw red flags and allow them to deal with small problems before they become full-blown SEC investigations.
With the volume of information and trading activity, this type of monitoring could seem impossible. Another area in which our services help this firm’s compliance officers is the Impact Ratings. Instead of checking every single release as it comes through the feed, the compliance officers can look at the Impact Ratings to identify releases likely to have an impact on a particular stock price. This cuts down the number of releases to be checked and enables the compliance officers to increase their overall efficiency.
These are but a few examples of how firms are working within their compliance departments to have better transparency into their operations. What other techniques have you found successful?