Two exchange operators have announced plans to launch artificial intelligence tools for market surveillance in the coming months and officials at a Wall Street regulators say they are about to do the same thing.
The software could snuffle around chat-room messages to detect dubious bragging around a big trade. It could be used to unravel complex issues, like “layering,” where orders are rapidly sent to exchanges and then canceled to move a stock price.
Tom Gira, executive vice president for market regulation at the Financial Industry Regulatory Authority (FINRA) said that the software could track down something dodgy which no one has thought of before.
FINRA plans to test the AI software next year, while Nasdaq and the London Stock Exchange Group expect to use it by the end of the year. The exchange operators also plan to sell the technology to banks and fund managers, so that they can monitor their traders.
Market surveillance already relies on algorithms to detect patterns in trading data that may signal manipulation and prompt staff to investigate. But the problem is that the high volume of data can lead to an overwhelming number of alerts, most of which are false alarms.
The “machine learning” software it is developing will be able to look beyond those set patterns and understand which situations truly warrant red flags, said Gira.