Brokers Beware - Big Brother Is Watching Your Every Trade

The Age

Tuesday June 14, 2005

IAN PORTER

A company that uncovered transactions by former HIH director Rodney Adler believes it can make a fortune from electronic broking, writes Ian Porter

A RECENT $100,000 fine given to a leading Australian sharebroker for something an internet client did has sharply improved the business outlook for an Australian market surveillance company.

The world market for broker self-surveillance could be worth "hundreds of millions of dollars" says Mike Aitken, a director of Capital Market Surveillance Services.

The same software used by CMSS was also used earlier this year to produce evidence in the Rodney Adler insider trading case, in which the former director of failed insurer HIH pleaded guilty.

"When the broker was fined because of what a client did, the management said, 'Gee, we didn't know this was going on'," Professor Aitken said.

He said the law holds the broker responsible for anything the client does as an e-trader when using the broker's trading licence to trade online.

"The brokers, especially the international brokers, are becoming more conscious of the risks they face in different markets if they are large firms.

"It could be one of your clients or, indeed, one of yours doing it on your behalf as a principal trade, and you could find yourself in hot water."

Professor Aitken said that, while CMSS now covered 90 per cent of brokers in Australia, it could eventually generate hundreds of millions of dollars around the world as more markets switch their systems over to automated trading.

He has reason to be optimistic about the move into international markets because his first company, Smarts, is now the world's leading provider of trading surveillance systems to market operators and regulators.

It was Smarts that gave evidence in the Adler case.

"The relevant transactions were in 2002 and I was able to recreate what happened precisely over the days on which he was accused of manipulating the market," Professor Aitken said.

The Australian Stock Exchange was among the first to switch to fully electronic trading, and that means there is a complete record of all trades right back to Black Tuesday, 1987, when the ASX switched on its electronic system.

"We can go back to 1987 for any stock, for any nanosecond, and replay the trading."

While the early adoption of electronic trading was a stimulus for Smarts, it did not secure its first contract until 1996, when the Moscow Interbank Currency Exchange implemented the system.

"Our next clients were the Hong Kong and Singapore stock exchanges and now we have 21 systems installed, including the Swiss Stock Exchange, the eighth largest in the world, and the Tokyo Commodities Exchange, the second largest in the world.

"Our closest competitor has installed two systems."

Having established a commanding position in market surveillance, Professor Aitken said directors turned their thoughts to other possible applications. Smarts helped form the Capital Markets Co-operative Research Centre and the CRC used the Smarts market surveillance system as the basis for a surveillance system specifically developed for brokers, which have significantly different needs to market operators.

The CRC then spun-off CMSS to market the broker surveillance system, but will offer potentially greater rewards, Professor Aitken said.

"With Smarts, we sell the stock exchange or the regulator the software and that goes inside their premises and we charge them maintenance.

"The CMSS business model is different, we provide the whole service. There is nothing on site, so we don't have to go through the brokers' IT (information technology) departments. That makes it much easier."

And more profitable.

© 2005 The Age

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