Banks are looking towards increasingly sophisticated surveillance and monitoring technology in FX, as they seek to reduce their risk exposures and ensure regulatory compliance.
Last month a group of banks led by Goldman Sachs and Credit Suisse invested $24 million in Digital Reasoning, a firm that provides cognitive computing technology that aims to analyze vast amounts of data while mimicking the human reading process.
Having previously worked alongside the US national security department, Digital Reasoning pivoted roughly two-and-a-half years ago into the financial services sector, as it believed that there was a clear gap in the market.
“What our customers in financial services were saying to us early on is that they’d made tremendous investment and advancement in monitoring transactions but that they had very little visibility on the human content side,” says Rob Metcalf, president and COO at Digital Reasoning. “Within financial services there’s a whole bunch of different risk areas, and almost all of them have some link back to human communications.”
Applied to financial services surveillance, cognitive computing is designed to help banks identify what would be “risky behaviour” for that institution. Front running, insider trading and control violations are all examples of such behaviour.
Instead of just having a series of key word matches, cognitive analytics looks at things such as sentence structure, what a particular word means in context, when words belong together and when specific concepts are being referenced.
In light of the recent fines levied against the banks for the behaviour of their FX traders, this clearly has significant implications. “So we could find something that involves a currency, the concept of time and some language around trading and have the ability to drive an alert based on that particular combination of semantics and other data features,” says Metcalf.
Perhaps unsurprisingly, Stephen Epstein, vice president of product marketing at the firm, reports that there has been a recent surge in interest from banks looking to adopt this technology for their FX divisions.
“A year ago when we were talking to large banks about this technology it was largely about equities, looking at issues like front running, but recently over the past two or three months we’ve been getting many questions about FX. That’s a consistent change we’re seeing with the firms that we’re engaging,” he says.
Epstein believes that the settlement announcements last week are likely to lead to a change in the way the FX industry is regulated. “We believe surveillance will play an important role in all this, especially in the area of communications as the FX industry is such a 'communication centric' business,” he says. “Being able to accurately monitor communication channels and proactively detect and alert an FX manager or compliance department when traders are colluding, trying to 'fix the Fix' or improperly placing orders is emerging as a priority for these institutions.”
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This article first appeared in: Profit & Loss Squawkbox, 17 November 2014