02-13-15

FINRA Hires Quant Help

On Wednesday, FINRA made an important hire. Erozan Kurtas, previously part of the analytics group at the SEC, will move to FINRA to become their head of Advanced Data Analytics. The move is a hat tip to the importance of data and analysis in policing modern financial markets. In hiring Kurtas, FINRA CEO Richard Ketchum commented that "It is critical for regulators to use 21st-century data analytics in order to keep up with 21st-century markets."

Since 2010, Kurtas has been integral to the SEC's response to the rise of algorithmic trading, an area that began receiving increasing attention after the first Flash Crash in 2010. The SEC's Quantitative Analytics Unit was designed to be a set of mathematical 'field agents' who would work directly with trading firms in order to monitor their activity from an analytical standpoint. This type of monitoring, which made pattern recognition easier, has enabled the SEC to identify instances of insider trading and other market abuses.

Within high frequency trading (for more information, see our previous posts on HFT here and here, or our White Paper on the subject here), Kurtas was active in pushing firms to properly document system processes and to do appropriate testing of all models before allowing them to actively participate in markets. In the Matter of AXA Rosenberg Group LLC, Kurtas' group proved that a trading loss of about $217 million was attributable to a program error rather than to 'market volatility' as had been claimed.

Kurtas helped create the National Exam Analytics Tool (NEAT), a database and program designed to review trading activity and search for violations of insider trading, front running or Regulation M. The speed at which activity could be reviewed significantly boosted the SEC’s ability to police markets in real time. The volume of data that could be analyzed by searching for a specific activity was also greatly increased, something Kurtas praised in his discussions of NEAT. Examiners could now review more information faster.

The hiring of Kurtas comes at a time when FINRA is facing a battle over its proposed 'big data' system: the Comprehensive Automated Risk Data System (CARDS). According to FINRA, CARDS was intended to be "a rule-based program that would allow FINRA to collect on a standardized, automated and regular basis, account information, as well as account activity and security identification information that a firm maintains as part of its books and records." This proposal was met with immediate pushback from the industry, which cited the potential threats to data security and personal privacy posed by the new system. FINRA revised its plans to exclude personally identifiable information, but that has done little to dissuade critics. A SIFMA study conducted two months ago found that 69% of investors opposed CARDS after reading a balanced description of the system, with that number jumping to 80% opposing after reading published concerns about the system.

Part of Kurtas' new role will almost surely be to bring some version of CARDS into existence. He will also play a key role in determining how CARDS is used to monitor account activity, and in investigating and supporting various enforcement actions on FINRA's behalf. His track record at the SEC suggests that he is up to the task.

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