February 9, 2004

Australian researchers have struck a major blow against economic terrorism, global stock market fraud and potential superannuation losses.

Researchers at the Capital Markets Cooperative Research Centre (CMCRC) have developed and tested fraud detection systems to provide brokers with instant warning of attempts to manipulate securities and other markets.

Surveillance systems developed by CMCRC research partner, SMARTS Pty Ltd are now protecting nine national stock exchanges and assisting four market regulators around the globe, making Australian anti-fraud technology the undisputed world leader, says CMCRC Chief Executive Officer Professor Mike Aitken.

Prof. Aitken said that the CMCRC in partnership with SMARTS Pty Ltd has now developed a range of real-time fraud detection systems to help prevent national and overseas fraudsters from undermining the wealth of the nation.

"Because we have access to unprecedented volumes of trading data from exchanges worldwide plus some of the best data analysts in the business, we've been able to profile the behaviour of fraudsters and market manipulators and to develop systems which identify and stop them," he says.

"In recent years Australia has placed great emphasis on protecting its physical borders. We need to adopt the same vigilance in securing our economic borders - in particular, our retirement savings."

First deployed in June 2003, CMCRC's new anti-fraud product, "Compliance Explorer", already monitors over 80 per cent of Australian equity transactions on behalf of brokers. Options and futures are being added this month.

Its huge power means it can monitor up to 15,000 transactions a second using hardware costing just $20k - enough power to process even the largest markets operating today.

With similar plans for the New Zealand, Singapore and other markets, the team expects to be able to provide international brokers with worldwide coverage of the main markets in which they trade by the end of 2005.

"We've designed it in anticipation of the fact that, within the decade the world's 240 markets will have consolidated into just 5-10 major global markets."

"Participating firms will be in a far better position to protect their own interests by securing themselves from rogue trading and simultaneously they will contribute to improved overall market integrity."

Prof. Aitken says that, in September 2003, around A$346 billion (over 63%) of Australian super funds under management were invested in listed securities on the Australian and overseas markets.

“If a fraudster is able to artificially depress the price of a basket of stocks at the end of a trading day, it is possible that superannuants cashing in their investment on that day will be severely financially disadvantaged.

"Alternatively, by pushing up a basket of stocks on a particular day, super policies could be cashed out at unrealistically inflated values, the cost of which is ultimately met by lower returns to other investors in the fund," he says.

This type of fraud is well documented and known variously as Marking the Close, Painting the Tape or Window Dressing.

"CMCRC has developed systems to identify this, along with 38 other possible abuses (including suspected insider trading and front-running) and is now implementing these systems in nations around the world to help protect their national wealth," says Prof. Aitken.

To date, nine national stock exchanges, four national regulators and a dozen international brokers have adopted these systems to help protect the integrity of their operations and ultimately the markets in which they participate.

The Capital Markets Cooperative Research Centre was formed in 2001 under the auspices of the Federal Department of Education Science and Technology (DEST) Cooperative Research Centre (CRC) program to bring together the best in innovative research and technology to the capital markets domain in a $62m research and development program.

"The CMCRC attracts the best of Australia’s researchers to work together with industry partners to develop new and innovative technologies for the capital markets domain - like these fraud prevention systems," Prof. Aitken says.

"Not only do we aim to protect Australia's wealth and interests in domestic and global markets, but also to make a real difference to the security, efficiency and trustworthiness of global capital markets."

This research addresses two of Australia's four national research priorities - frontier technologies for industry and safeguarding Australia.