17 February , 2004 12:36:18
ABC Local Radio: The World Today
Reporter: Julia Limb

HAMISH ROBERTSON: Australian researchers have developed a system to protect the nation's wealth through the use of real-time fraud detection which alerts stock markets and broking houses to unusual movements in the markets.

Ten stock exchanges are now using the system, which can monitor up to 15,000 transactions per second, although it's yet to be adopted here in Australia. The research is being led by Michael Aitken, professor of capital markets technology at the University of New South Wales.

Our reporter Julia Limb has been speaking to Professor Aitken, and she asked him first to explain the problem of economic terrorism.

MICHAEL AITKEN: 9/11 was a time when terrorists clearly knew what they were about to do.

Now, if you did know that, the thought is that you could go into the market place and sell securities significantly on that day – and there is some thought that that happened – you can sell the securities today at a very significant price, and tomorrow you can buy them back at a much lower price because the market crashes as a consequence of their acts.

So essentially they can benefit as a result of knowing that they are about to perpetrate terrorism on the world that they can benefit in the securities market.

JULIA LIMB: So what you've developed is a system that would pick that up?

MICHAEL AITKEN: Yes, it would identify when there are unusual amounts in this case of what we call "short selling", when people are selling the stock without actually having it, and we would identify unusual amounts of this type of trading, and seek to identify who's been doing it.

JULIA LIMB: So is this something that really is required around the world – a better sort of security system for the stock market?

MICHAEL AITKEN: Indeed, because the problem at the moment is that most exchanges are connected by MOUs, which means that they share information but they don't have the same technology, so these types of… well, not just terrorists but security market manipulators can rely on the fact that the exchanges are not well connected technologically-wise and make money from it.

JULIA LIMB: And is this something that would affect just ordinary people?

MICHAEL AITKEN: Indeed. Let me give you an example. Imagine you're about to cash out your superannuation policy, and suddenly as a consequence of the decision to push the price of a security down, for whatever reason, you cash out your policy on that day and you suddenly cash it out at an unrealistic value.

Alternatively, for those people that cash it out at a very good value, that means that the rest of the people in the fund have to bear the cost of that. So it literally means that superannuation savings can be under threat.

JULIA LIMB: Professor Aitken, how is it that this type of activity is happening?

MICHAEL AITKEN: I mean, it's often set down to greed. You can find all sorts of examples, but I'll give you a potential example: you have a fund manager who's remunerated by the price or the value of the portfolio at the end of the month.

The more the share price goes up, the greater the value, the greater his remuneration. There are incentives potentially, for that type of person, in personally remunerating themselves, to disaffect the rest of the community.

JULIA LIMB: Have the systems been adopted?

MICHAEL AITKEN: The system is now adopted in ten national exchanges and four national regulators around the world, making us the market leader, and we're now using a variant of the system, and ten brokers in Australia are using it in a second level of monitoring.

JULIA LIMB: And is it also something that's being used by the Australian stock exchange?

MICHAEL AITKEN: It may be in the future.

JULIA LIMB: And how important so you think it is for us to look at this type of protection, I guess of our economy rather than just about physical borders?

MICHAEL AITKEN: 63 per cent of people's superannuation, namely their retirement savings, is invested in securities. If we don't protect against the ability of people to manipulate those securities, then implicitly, we're open to attack, or we're allowing open to attack Australia's very wealth.

JULIA LIMB: And do you think that that's something that's a very real threat at the moment?

MICHAEL AITKEN: Indeed. It is a very real threat, a threat that very few people really, are acknowledging.

HAMISH ROBERTSON: Professor Michael Aitken from the University of New South Wales. He was speaking there to our reporter, Julia Limb.