Shield - Stay one Step Ahead Using Technology

BLog By Iftach Drori:- THE DETECTION SERIES

Front Running: using technology to stay one step ahead

Introduction In 2018, the World Economic Forum released data that highlighted fraud and financial crime as a trillion-dollar industry.

Two years later, analysts are citing $3.5 Trillion as the current cost of financial crimes. Throughout the history of market fraud, corrupt actors have made history by finding loopholes to exploit so that they can amass great wealth, illicitly acquired through market abuses such as front running, spoofing, layering, insider trading, and more.

How does front running work?

Front running is an illegal form of market manipulation. The fraud is enabled via insider trading and is prosecuted on the grounds of affording the perpetrator with “an unfair advantage".

1) a client initiates a large stock purchase request.

2) the broker transacting the purchase executes his/her own order (“front running” the client) 3) the broker then executes the client’s purchase.

4) the stock price goes up.

5) the broker profits from the sale of his/her stock purchase.

Smartphones are a problem With dozens of providers now offering “burner phones,” which provide the user with a temporary, unidentifiable number that cannot be traced back to the owner, front running is becoming even more difficult to track. A quick call or text exchange on WhatsApp with a burner phone circumvents surveilled communications and enables the exchange of critical information to enable a front-running crime – without the risk of being caught.

Comparatively, in-house communication systems aren’t wholly effective either. Bloated, proprietary in-house communication solutions have high rates of dissatisfaction and low rates of adoption. For the most part, the technology is available. However, it just can’t be applied ubiquitously and automatically. At least not yet.

Technology is only part of the solution Sending a “stock tip” is surprisingly easy to do, despite increased surveillance and advanced technologies. Police and regulatory agencies are increasingly using technology to monitor civilians as well as commercial brokers, but citizen watchdog efforts and ethics boards are challenging broad access. Apple is notoriously upheld as a champion of privacy, even if the mobile phone holder is accused, or convicted of heinous acts of terrorism and other crimes. .

Identify theft and crypto-mining are, perhaps, the most notable examples of technologyenabled financial crimes. However, front running, which is a common form of insider trading, will be the theme of the examples featured here.

Recent cases of front running In 2013, Daniel Bergin, a trader at Cushing MLP Asset Management, was using his wife’s accounts to shield his front running of hundreds of trades. His illicit profits reportedly topped $1.7 Million. In 2011, Mark Johnson was HSBC’s former global head of foreignexchange cash trading. He abused his position to create more than $7.3 Million in profits for the bank by front running a large trade issued by one of the bank’s clients. And may other financial frauds was happend.

The fox is guarding the henhouse There’s a bit of a conundrum within the field of market abuse surveillance and how front running is monitored. Financial institutions require that brokers sign contracts which stipulate their conversations will be monitored but employers are challenged to tightly define and walk the delicate line between proactive monitoring and privacy, particularly when it comes to eComms. Employers are also required to show “substantial evidence” to indicate probable cause before a forensic audit to be approved but in order to do so, they run the risk of violating personal privacy for which they are liable.

Conclusion This issue is particularly acute within the niche of eComms as new modalities are now appearing regularly while regulations, market fraud monitoring systems’ technology and company policies are lagging behind these innovations. And, it becomes a matter of how current the technology is regarding the likelihood of detecting, reporting and successfully prosecuting the front runners.

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