Insider Trading Fraud Detection

An senior management professional at a top investment bank was proved guilty of insider trading, who was accused of using non public confidential information about a client's major acquisition plans to trade in the stock market and make significant profits trading in options. The Securities and Exchange commission brought civil charges against him in parellel to criminal charges.

This case resulted in significant reputational damage to the firm as it exposed the absence of robust compliance and monitoring systems to prevent insider trading.

How to detect insider trading fraud ?

Firstly, we need to have an accurate extract of the dataset that contains the trader Name, trading volume, date, scrip and price information. When we leverage data visualisation tool like Power BI to plot data of trading volume with time to understand trends and know any spikes of volume that can be potentially suspicious.

Nextly, we will need to recognise the dates where there are abnormal volumes traded by traders and check whether they coincide with any earnings release or significant announcements at the firm.

If there are patterns of traders who have managed to puchase high volume of shares before any such event dates, that can be a significant indicator of fraud happening.

Challenges to overcome...

Globalisation of the securities market has made it increasingly difficult to monitor and control insider trading. Therefore, regulators must collaborate internationally to identify and prevent insider trading.

The growing influence of social media also pose challenges as it has made it easier for people to have access to sensitive information that may otherwise be categorised as confidential.

The emergence of new financial tools like exchange traded funds (ETFs), cryptocurrencies and growth of derivative market instruments has made it even difficult to spot illegal trading activity and managing the dangers posed by these instruments is a significant challenge faced by the regulators.

Role of Technology?

With the use of technology, advanced investigative methods can be deployed to enhance insider trading surveillance, timely detection and investigation.

Securities and Exchange Commission has began to enforce insider trading related laws that has helped companies establish an effective system for internal controls to prevent insider trading.

The cutting edge algorithms and Artificial Intelligence powered surveillance mechanisms has enabled faster evaluation of massive volumes of trading data that gets generated every minute. These systems can spot probable instances of market manipulation, insider trading and other illegal market activities.

The retail market participants can have a level playing field and regulators can ensure fair and transparent trading activity in the market by leveraging the potential of Generative AI and machine learning algorithms, thereby ensuring efficient and real-time market surveillance.