Traders" tools turn tables on dodgy deals Set a thief to catch a thief, the adage goes. When it comes to catching insider traders, the UK financial watchdog hasn't gone quite that far, but it is turning to trader's tools. Under the leadership of Patrick Spens, a former Citigroup and hedge fund manager, the market monitoring division of what is now the Financial Conduct Authority has launched a data-based attack on suspicious trading. First the FCA stepped up the pressure on City banks and brokers to do a better job of getting information to the regulator both about ordinary trades and those that looked suspicious. Under UK law, banks and brokers must report every single transaction in a regulated security to the FCA every day. But many groups fell short of their responsibilities until the watchdog fined Barclays and eight other companies a combined £8m and forced them to go back and re-report everything they had missed. Now the watchdog gets 13m detailed transaction reports every day with details of who bought, who sold and for how much. It is thought to be the most comprehensive regulatory database in the world. Next Lord Spens, who has a hereditary title, stepped up the pressure on banks and brokers to live up to their duty to flag up unusual trading. After much prodding of companies, the watchdog also received 1018 "suspicious transaction reports" last year, nearly double the previous total. But data are only as good as the ability to interpret it, so the FCA hired a team of quantitative analysts and set them to work writing algorithms. Some of these "technologists" come from industry; others have PhDs in maths or statistics. Bolstered by the latest in high-end analytics servers as well as commercial surveillance software from Nasdaq OMX, the quants are writing programmes to comb the transaction data alongside news feeds to identify timely trades and unusual patterns. For Lord Spens, who oversaw the building of Citi's trading algorithms a decade ago, the FCA's task is a familiar one. Using experience born from trading algorithms intellectually is no different from looking for abusive behaviour in the markets. Both rely on huge data sets where you are looking for patterns and anomalies," he says. The quants represent a small share of the 60-person market monitoring programme and their special project budget is in the millions of pounds. They have been at work for close to 18 months now and their programmes are being gradually introduced into a variety of securities markets. By marrying the algorithms with the STR's received, we can self-police the quality of STR submissions It is still early days, but the efforts are starting to bear fruit with a stream of alerts that are probed for obvious explanations - such as a news report or a matching trade that makes clear the lucky one was a hedge. The rest are then referred on to the enforcement division for possible investigation. Over time, Lord Spens predicts, the surveillance system will only get better as the results from the computers are compared with the STRs sent in by the companies. "By marrying the algorithms with the STR's received, we can self-police the quality of STR submissions and create a virtuous circle of surveillance," he says. Enforcement cases take years - several City professionals first arrested with great fanfare in 2010 won't go on trial until September 2014. But knowing someone is watching appears to be having a deterrent effect. Suspicious trading before UK mergers and acquisitions fell to the lowest level in more than a decade last year.