[ by Howard Haykin ]

SEC Chairman Mary Schapiro said Thursday the Agency is upgrading its investigative technology to improve trade surveillance, thus enabling staffers to more readily identify "suspicious trading patterns and relationships among multiple traders and across multiple securities.’’
 
Ms. Schapiro readily admits that trading firms spend significantly more than the SEC on techology advancements and enhancements - the IT budgets of some firms greatly exceed the SEC's budget for the entire Agency.  Nevertheless, “newly-developed analytics” help the SEC examiners and other staffers to spot abuses, making it possible for the SEC to wade through literally millions of documents and thousands of hours of conversations to find the proverbial needle in a haystack that lets us sew up a case.’’

Examples of Enhancements and Upgrades. Ms. Schapiro offers several examples of upgrades and the impact they've made to the effectiveness and efficiency of various SEC units. 

• Agency's infant Automated Bluesheet Analysis Project. Chief among the SEC improvements are the upgrades made for Blue Sheets, that no longer are printed on blue sheets of paper.  This data and information provide the SEC with detailed information about trades performed by a firm and its clients. The information, now sent in electronically, includes the security's name, the date traded, price, transaction size and a list of the parties involved.

• Pattern Analysis to Root Out Market Abuse. The new SEC Market Abuse Unit has spearheaded the analysis project for SEC Enforcement.  With this tool, “staff are able to search across this database to recognize suspicious trading patterns and identify relationships and connections among multiple traders and across multiple securities, generating significant enforcement leads and investigative entry points,’’ according to Director Robert Khuzami.

Case Example of the Pattern Analysis. Schapiro said the pattern analysis led to a case being filed earlier this year against Matthew Kluger, a corporate associate at the law firm of Wilson Sonsini Goodrich & Rosati and Garrett Bauer, a trader.  The two, Schapiro said, “ran a lucrative insider trading scheme spanning two decades.’’

In that case, Kluger "performed searches on Wilson Sonsini' s computer network," to identify documents establishing that a client of the firm about to participate in a merger or acquisition.  Once Kluger found the documents, he would pass the material to an intermediary who in turn used public phones or disposable mobile phones to pass on the information to Bauer.  Bauer would make trades for himself, Kluger and the intermediary, then later sell the stock after the merger or acquisition was announced. 

At first, SEC "investigators were unaware either of Bauer or the middleman’s relationship with Kluger," but analysis of blue sheet trading data led to the identification of the middleman and his relationship with Bauer.  The automated system allowed the agency to identify parallel trading that "gave away the nature of their relationship.’"

• Aberrational Performance Inquiry conducts inquiries that focus on data on the performance of investments to identify hedge fund managers that may be engaging in fraudulent practices, before a tip is received or an examination discovers questionable behavior.  The inquiries rely on a variety of risk models and in-house technology to provide, in effect, automated tips that lead to investigations.

• "E-discovery" System enables staffers to make wide searches of data produced for the agency by the securities industry to find “needles that might have been missed or overlooked.’’  And that system will be integrated with other tools, including technology that allows phonetic searches of voice recordings, to find leads.

For further details, go to:  [Traders Magazine, 10/12/12].