Attention Insider Traders: These Wall Street Vets May Have the Tech to Nail You

December 2, 2014 – In The News

Ernest Badway was quoted in the Forbes article, “Attention Insider Traders: These Wall Street Vets May Have the Tech to Nail You.” Full text can be found in the December 2, 2014, issue, but a synopsis is below.

Mathew Martoma, a former hedge fund manager for S.A.C. Capital Advisors checked into prison on November 20th.

In Martoma’s September sentencing, the judge called his illegal trading edge “deeply corrosive to our markets.” But what if the SEC. and FBI had been able to utilize cutting-edge software that could have detected illegal trading?

AIMPaaS may have come up with a viable solution: A comprehensive software system that appears to be unique in the financial services industry. It not only executes the stock orders, but it also employs sophisticated behavioral modeling of traders and portfolio managers that can detect insider trading and other nefarious or impermissible activities.

Of course, many traders won’t like all of this monitoring, and surly ones might even toss their phones (and perhaps their bosses) across the trading floor. The worst of the lot— the Mathew Martomas of the Street—could game it, said Ernest Badway.

“Traders are clumsy cowboys,” stated Badway. “They can’t always be pinned to a particular way of trading. They’re on their own, a lot of them are known, so one of the things they usually do is throw red herrings out there so that they’re not followed [by other traders, or even their own compliance people]. They can’t necessarily fool the algorithms, but they can make them take a pause. Different types of trading aren’t necessarily wrong—it could be part of his strategy. Or, like a prisoner throwing off the scent of a hound dog, a trader doing insider trading could deliberately cause a red flag to throw the system off. And then he can say, ‘See, your system doesn’t work.’ For every computer program, there’s always a glitch.”

There is a reporting obligation to regulators that’s still required. “Once authorities see the report, in all likelihood there would be an inquiry,” explained Badway. “I’d be shocked if there wasn’t an inquiry, because you just gift-wrapped it for them.”

However, there may still be issues over whether the firm’s policies and procedures were reasonable given what occurred. “If they have a software system that does it, that’s helpful—that’s great, that’s perfect. I always tell my clients, ‘Just because you have an electronic system, you have to make sure it works. You may have caught this one, but what about the other ones?’ You’ll have regulators asking for reports to make sure the system is operating appropriately.”