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Regulators Use Silicon Valley’s AI to Catch Rogue Traders

In Robert Harris’s 2011 novel The Fear Index a secretive hedge fund builds a computer capable of making its own trading decisions.

Gobbling up information, the machine starts to confuse its human creators by building huge stakes and making a handsome profit from a market panic. As they assess the outcome, one of the protagonists notes: “The beauty of it is that it was but 0.4 per cent of total market volatility. No one will ever notice, except us.”

As markets increasingly rely on computer algorithms, reality is imitating fiction: artificial intelligence is becoming a bigger part of investing and it is also helping regulators ensure that traders do not get away with bad behaviour.

“Algorithms facilitate the ability to get into and out of the market very quickly. That’s the more recent challenge. You can have efficient strategies that 10 or 20 years ago you’d have needed more people to execute,” says Michael O’Brien, head of product development at Smarts Trade Surveillance, a unit of Nasdaq, the US exchanges operator.

Regulators and policymakers have already responded to the market’s inexorable move over the past decade to electronic trading of assets like futures and equities.

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