Algorithmic trading has traditionally been linked to trading orders and developing investment strategies, but the technology is now gaining traction as a means to catch white collar crime.
This is the word from Rick Parry, MD of Progress Software South Africa, which markets the Apama complex event processing platform locally.
"For years algorithmic trading has been used to help analysts and investors track events, identify patterns and assist with investment decisions," says Parry.
"Now it is soaring in popularity in the financial world as a market surveillance tool to detect insider trading and market abuse.
"Progress has been working with several international regulators, including the UK's Financial Services Authority (FSA), to incorporate realtime fraud detection technologies into its market monitoring endeavours to help detect fraud."
Progress has teamed up with specialist consultancy Detica to encode market knowledge into algorithms that detect illegal trading patterns.
Instead of recording whatever happens in the market and looking at it at the end of the month, the FSA is proactively monitoring the market in realtime through algorithmic trading to detect abuse before it moves the market.
"The technology enables them to detect fraud while it is occurring, so they can spot insider trading from traders who could be colluding with insider knowledge to buy across different trading venues," Parry says.
Traders who constantly take a best offer in a market to drive up a share price will also not be spared.
"There are hundreds of these illegal trading patterns, but traditional algorithmic techniques have not been able to do it in realtime," Parry notes.
"But as markets grow and these issues continue to emerge, South Africa will not be exempted and we can see this platform making a real impact here."
Apama is used in many industries worldwide. A category of software known as complex event processing (CEP), it can analyse millions of events in realtime, as they are occurring, to detect patterns. Apama can be used by financial regulatory bodies, the military and police, logistics companies, cellular telephony operators and other telcos, credit card companies and many others.
Examples of its deployment are the detection and prevention of credit card fraud; analysing patterns in passenger movements so as to detect potential terrorists; and predicting the best route for vehicles, such as tanks and long-haul transport.
"CEP offers the ability to manage and monitor countless millions of events at the same time, to find a trend or exception, and to report it to management early enough for corrective action to be taken. As such, CEP goes beyond traditional technologies such as business intelligence and business activity monitoring," Parry concludes.