Clutch VP Varun Mehta and President Brandon Daniels Quoted in Financial Times Piece

December 1st, 2014

Clutch Group’s Varun Mehta and Brandon Daniels were recently interviewed for a Financial Times article that discusses how big banks are using big data to crackdown on illegal behavior by their staff. Read the full text below, or follow this link to the article.

Banks tap into big data to trap wily traders

Bankers beware – big data are watching you.

A recent swath of trading scandals has spurred big banks to turn to new technology and data sources as they attempt to crackdown on illegal behaviour by their staff.

Financial institutions are increasingly moving beyond employing traditional compliance systems, which have focused on monitoring electronic communications and transaction prices, and using state of the art surveillance software as they seek to stay one step ahead of wily bankers and traders.

The drive to incorporate behavioural science and new data sources comes after analysis of electronic messages has helped regulators ensnare bankers accused of rigging interbank lending rates and, most recently, foreign exchange rates. That behaviour has led to a swath of multibillion-dollar fines and settlements.

The worry now is that bank employees will go underground to engage in illicit behaviour, prompting an internal race as compliance officers seek to root out malfeasance by “front office” staff.

“The days of traders saying something really dumb, which then gets picked up by a filter are largely gone,” said Michael O’Brien, global head of SMARTS Broker, Nasdaq’s market surveillance business.

Banks have long worried that staff may turn to personal cell phones or social media platforms such as Snapchat or Facebook, to avoid having their work communications monitored by compliance systems.

To combat that risk, some compliance departments are benchmarking staff’s performance against average use of internal communications – trying to detect discrepancies between their profitability and the number of messages sent to clients.

“If an average trader’s been hitting the same benchmark or better than peers on their desk but the volume of messages they’re sending on internal messages is significantly less, that’s a red flag,” says Varun Mehta, vice-president of legal and compliance solutions at Clutch Group. “Are they using a burner phone or something else?”

The holy grail is marrying up the communication surveillance with trading surveillance. If someone is really determined to do something illegal it makes it that much more difficult to detect

– US bank lawyer

To combat the use of personal phones, banks are also restricting mobile phone usage on trading floors to certain frequencies that can be monitored. Key card data and human resources information may also be examined to ensure bankers and traders are not taking too many “smoke breaks”, says Brandon Daniels, president of Clutch.

The increasingly high-tech surveillance of bankers and traders has raised legal issues with financial institutions, particularly in Europe where banks may struggle to reconcile increasingly heavy compliance requirements with local privacy laws.

“This is the zeitgeist,” Mr Daniels says. “Everyone will be monitored.”

Communications analysis – alongside transaction analysis, still the predominate form of compliance monitoring – is becoming more sophisticated too, with algorithms and artificial intelligence being used to identify patterns of speech and networks of contacts as opposed to merely catching keywords.

Bill Nosal, head of product development at SMARTS Broker, said traders were unlikely to use obvious statements such as “it’s time to set up our insider trading ring or manipulate a market. That’s why it’s sometimes better to do the linkages of communications and tie them to abnormal trading”.

The key, according to analysts, is to bring senior traders or former bankers into the compliance function to help identify strategies or unusual patterns that can be worked into the system.

“A lot of times what someone says doesn’t mean anything. It won’t mean anything unless you look at trading,” says one lawyer at a large US bank.

“The holy grail is marrying up the communication surveillance with trading surveillance. If someone is really determined to do something illegal it makes it that much more difficult to detect.”

Fonetic, a Spanish software company that analyses audio and written communications, launched in the US this year. Its software – utilised by clients such as BBVA and Santander – uses real-time phrase recognition technology, as opposed to analysing transcripts, and is capable of flagging related words and phrases to broaden its search capabilities.

For example, if a bank is trying to identify traders talking about bananas, it could use the software to search not only “banana” but also “yellow,” “long”, “fruit,” and “monkey”.

The message to fraudulent traders is clear: banks are shining an increasingly bright spotlight on all corners of their business.