Insider Trading: Do the banks really care?

Jonathan is a 2nd year Finance/Econometrics PhD student at Durham University Business School, has an MBA in Finance from Durham and a PhD in AI/Neural Networks from the University of Sunderland. He is the CEO of a start-up ‘Adaptive Technology Solutions’ and was project manager for an insider trading project, CASSANDRA, at the University of Sunderland. He has published over 20 papers on the application of neural networks, genetic algorithms and statistical analysis to problems in engineering. He has also contributed to Forbes’ ‘AI report’ article in 2009.



In August 2017, I attended the offices of a ‘very large’ corporate bank based only a stone’s throw from Canary Wharf and the Gherkin in London, eager to show the product of two years of research into the problem of insider trading and market abuse. This was a software solution needing the support of a bank or hedge fund through a letter of support, data, or even the possibility of their becoming my first customer. This bank held the dubious honour of having paid out more than a billion dollars in fines – more than any other bank in recent memory. Surely, they would see the need for an advanced detection system which could cost them a fraction of the punitive damages they were being forced to continually pay to regulators courtesy of their wayward employees’ behaviour?


No.


The bank official I met sat through my presentation with a languid smile on his face, barely suppressing a yawn from time to time. The sense of deflation I felt on leaving their plush, glass and steel offices was overwhelming. Sitting in Kings’ Cross station waiting for the train back to the North East, I began to ponder on the nature of the conversation we had had that afternoon. Here is a man, fronting for an organisation that knows it has a serious problem with employee fidelity, who took the time and effort to highlight not only his bank’s but the ‘dream solution’ for the entire banking industry on a large white board. A few weeks later, I received an e-mail informing me that although my approach was interesting and novel, they had decided to apply an ‘internal fix’ to their current systems and policies following a new appointment to the position of compliance officer. Additionally, collaborating with a new start-up would be subject to their due diligence requirements in order to join their preferred supplier.


Over the years, this would become a popular refrain from banks and hedge fund executives and the heads of their technical departments. Even recruiting the head of one bank’s compliance department to my management team made very little difference in persuading the head of machine learning at his bank to lobby for the solution we were advocating. This left me wondering; were they truly interested in working with small start-up companies who could offer an outsourced solution to the problem in exchange for some level of support, or were they looking to ‘pick the brains’ of people for solutions which they could subsequently develop in-house?


The extent of insider trading alone warrants the investigation by the financial services industry into new technologies and approaches to counter it. Despite illegal insider share dealing and market abuse being an offence in every European, Asian, North American and Latin American country with imprisonment and large fines for those convicted, it continues unabated. The UK’s Financial Conduct Authority (FCA) prosecuted only twelve cases in the past five years and secured only eight convictions (Ellison, 2018). The USA has been considerably more vociferous in investigating and prosecuting insider trading fraud. It remains a crime on the increase with the disturbing possibility that as many as 25% of all public company dealings in the USA are tainted by illicit dealings (Augustin, 2016). ‘Insider trading is rampant in the U.S. securities markets’, according to Preet Bharara (2014), the former U.S. Attorney of the Southern District of New York.


Has this worsened under the stewardship of the ex-president of the USA? Totally committed to de-regulation, Donald Trump’s election campaign in 2016 struck a clear anti-globalisation stance. This is concerning as the USA is a major player in trans-national organisations, such as the Group of Governors and Heads of Supervision (GHOS), concerned with regulation of financial markets, staffed by directors of the Federal Reserve, the comptroller of currency and the Securities and Exchange Commission (SEC). President Biden has said little during his election campaign to indicate his attitude towards Wall Street. Yet, his recent appointment of Janet Yellen as Treasury Secretary signals the likelihood of his intent to roll back much of the deregulation of the current administration, given that Yellen’s brief includes oversight of federal agencies including the SEC and the commodities future trading commission (FT, 2020).


Could this simply be a case of ‘it's not what you know but who you know’? It is certainly not for the want of organisations and business support groups. Dozens of council schemes and enterprise initiatives exist throughout the North East, touting for the hearts and minds of would-be entrepreneurs, with similar schemes run by our five local Universities (including University of Sunderland’s ‘Sunderland Futures’ and Durham’s ‘Funding Student Ventures’ initiative). However, with their complex array of eligibility criteria and limited financial support for FinTech, they are in many cases a bad fit for projects like ours. FinTech is complex, requiring multiple rounds of venture capital and/or grant funding. Yet, there is a need for high performance FinTech products throughout the banking industry, which has seen schemes such as TechStars appear. However, without a far greater level of support and assistance from financial institutions, no amount of mentoring or training will be enough.


References


Augustin, P. (2016) Detecting Illegal Insider Trading, Harvard Law School Forum on Corporate Governance, Available at: https://corpgov.law.harvard.edu/2016/11/27/detecting-illegal-insider-trading/


Bharara, P. (2014) Insider Trading Is ‘Rampant’ On Wall Street, Frontline PBS, Available at: https://www.pbs.org/wgbh/frontline/article/preet-bharara-insider-trading-is-rampant-on-wall-street/


Ellison, A. (2018) City traders getting away with abuse of markets: Insider deals by white-collar criminals ignored, The Times, Available at: https://www.thetimes.co.uk/article/city-traders-getting-away-with-abuse-of-markets-3czm07nkp


FT (2020) From tax to trade: where Joe Biden stands on the big issues President-elect’s policies are more progressive than his moderate image suggests, Financial Times, Available at:

https://www.ft.com/content/df1b1656-769d-4b7c-9f3a-cb003ced11f1