The NASDAQ exchange creates intense data traffic with an impressive 14 million trades a day. As a result, it is extremely difficult to track down market abuses, but Nasdaq is finding a unique solution to that problem with the use of AI technology.
It’s easy to go unnoticed in a crowd, and with 14 million trades a day it is incredibly difficult for a major exchange like NASDAQ to monitor the market and catch everyone who isn’t following the rules. This is a major issue being faced by NASDAQ’s senior vice president and head of risk management, Valerie Bannert-Thurner. In finding market rule violators, Bannert-Thurner knows what to look for and how to find it. Yet, the sheer number of transactions means only a portion of potential violators can be caught.
Until now, NASDAQ has used their proprietary SMART trade surveillance program, and it has proven to be successful. According to Bannert-Thurner, they look for people that are “excessively profitable,” analyze their market data, and determine if profits are good fortune or bad business.
The NASDAQ SMART Platform
Without some assurance of the integrity and fairness of their market, the NASDAQ would not be as successful. It operates 25 exchanges between the U.S., Canada, and Europe, and this is in no small part to their reputation for reliability and integrity.
Their SMART trade surveillance program is at the heart of that reputation, and its use by 45 outside exchanges and 13 regulators are a testament to its quality.The SMART trade surveillance program is at the heart of NASDAQ's reputationClick To Tweet
It works by using the SMART platform to detect red flags in behavior by simultaneously analyzing what traders are saying in their emails or chats and what their actual trades are. Large teams will pair up the two sources of data and cross-reference them to find any wrongdoing.
The system works, but it requires a lot of manpower and it still can’t analyze the market fast enough to catch everything. To address this, Bannert-Thurner is turning to AI technology to help.
How AI can Help NASDAQ to be More Secure
The success of the SMART program notwithstanding, there is still room for improvement. AI might be the perfect way to lighten the workload on SMART analysts.
AI use language processing software combined with machine intelligence, and this means that it can learn as it analyzes market data and communications. If nefarious traders were using certain code language in their communications, an AI could recognize key terms and trends in the communication and alert the SMART platform of the issue.
“If nefarious traders were using certain code language in their communications, an AI could recognize key terms and trends.”
The AI would not replace the human members of SMART teams. In fact, they will be able to improve the efficiency of every worker. An AI would do this by doing the grunt work of filtering out loads of data. People can do this, too, but an AI will have it done in nanoseconds.
The SMART teams would rely on the AI to present alerts and evidence of wrongdoing so that further action can be pursued. This would boost efficiency and security for the exchange.
NASDAQ has a high standard, but such standards can be compromised with time. For NASDAQ’s sake, let’s hope that modern AI technology will help them fight back.