Software to challenge the insider dealers

Artificial intelligence can detect dodgy deals, says Paul Gosling

Insider dealing is more likely to be exposed now that the Stock Exchange is to use artificial intelligence to automatically monitor share trading. Traders using secret information and companies manipulating share prices can expect to be detected by what is claimed to be the most advanced software installed anywhere in the world which analyses share deals.

The most commonly used form of artificial intelligence is neural networking, software that operates in ways that mimic the human brain. But where the software scores is, unlike a human, it can work from hundreds of pieces of data simultaneously.

Credit-reference agencies have used neural networking for 10 years or so. Their databases store information and patterns of behaviour of people and corporations prior to insolvency. The software can then pick up warning signs that predict bankruptcy.

Bradford University is one of the country's leading bodies working on neural networks. Nick Wilson, its professor of credit management, says: "You can monitor a huge range of variables."

To predict a company's impending financial crisis can involve examining a range of factors that might not otherwise be obvious warning signs, says Professor Wilson. These might include changing the auditor, increased audit fees, late filing of accounts, qualifications of accounts, and any resignations of directors, as well as more usual factors such as liquidity ratios, gearing, speed of payment of bills, and profit levels.

Even an increase in turnover may be a warning indicator, as organisations in distress may sell fixed assets as a way out of immediate crisis, while reducing a business's viability in the longer term.

It is only in the past few months that the potential of neural networking has become clear. Improvements in computer processing have allowed sums that once took a full day to take just a minute.

Tom O'Brien, a partner in Andersen Consulting, says: "The biggest application is in the financial services arena, especially for brokers in futures and options, looking at spreads and prices." Auditors might use neural networks to better pick out fraud, distress signals and weak performance. Insurers might use neural computing to improve their marketing, highlighting customers who are covered for car and household insurance, but not for life cover. Banks are adopting the systems to improve their mail shots, to eradicate the practice of encouraging customers to apply for loans that would actually be refused.

"You can use it to match customers to products, and predict demand," says Mr O'Brien. He says it could also prevent poor service, anticipate customer complaints, and apologise for service problems.

A number of banks are looking neural networks for fund management. It may be used alongside share-tracking programmes so that computer software would not simply follow the market, but could predict it as well. But neural networks have limitations in their effectiveness. While they can predict bankruptcy, they are unable to justify their predictions. This is a drawback for credit-reference agencies the lenders who use them.

One solution is to use other forms of artificial intelligence alongside neural networks. So-called "fuzzy logic" can back-up the results of neural networking. And "genetic algorithms" can explain the outcome to outsiders, by examining the results and relating them to agreed criteria.

SearchSpace, which is providing the Stock Exchange's software, is running the three models alongside each other. Konrad Feldman, a consultant with SearchSpace, says: "Genetic algorithms can produce rules which are transparent."

But however good the software is, it does not in cure the problem of illegal share dealing, and may not provide the proof needed for conviction. "Prosecution is not something we are involved in. The burden of proof is a different matter," says Mr Feldman. "We can provide the reasons behind something suspicious, and give the mitigating circumstances."

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

PROMOTED VIDEO
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Web Developer - PHP

    £16500 - £16640 per annum: Recruitment Genius: This fast growing Finance compa...

    Ashdown Group: Client Services Manager - Relationship Management - London

    £30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...

    Recruitment Genius: Credit Controller / Customer Service

    £18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...

    Guru Careers: In-House / Internal Recruiter

    £25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...

    Day In a Page

    Woman who was sent to three Nazi death camps describes how she escaped the gas chamber

    Auschwitz liberation 70th anniversary

    Woman sent to three Nazi death camps describes surviving gas chamber
    DSK, Dodo the Pimp, and the Carlton Hotel

    The inside track on France's trial of the year

    Dominique Strauss-Kahn, Dodo the Pimp, and the Carlton Hotel:
    As provocative now as they ever were

    Sarah Kane season

    Why her plays are as provocative now as when they were written
    Murder of Japanese hostage has grim echoes of a killing in Iraq 11 years ago

    Murder of Japanese hostage has grim echoes of another killing

    Japanese mood was against what was seen as irresponsible trips to a vicious war zone
    Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

    Celebrities call on David Cameron to take more Syrian refugees

    One young mother tells of torture by Assad regime
    The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

    The enemy within

    People who hear voices in their heads are being encouraged to talk back
    'In Auschwitz you got used to anything'

    'In Auschwitz you got used to anything'

    Survivors of the Nazi concentration camp remember its horror, 70 years on
    Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

    Autumn/winter menswear 2015

    The uniforms that make up modern life come to the fore
    'I'm gay, and plan to fight military homophobia'

    'I'm gay, and plan to fight military homophobia'

    Army general planning to come out
    Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

    What the six wise men told Tony Blair

    Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
    25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

    25 years of The Independent on Sunday

    The stories, the writers and the changes over the last quarter of a century
    Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

    Homeless Veterans appeal

    As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
    Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

    Smash hit go under the hammer

    It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
    Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

    The geeks who rocked the world

    A new documentary looks back at origins of the computer-games industry
    Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

    Belle & Sebastian is taking a new direction

    Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea