A Machine Learning Attack on Illegal Trading

58 Pages Posted: 21 Jan 2021 Last revised: 25 Jan 2021

See all articles by Robert James

Robert James

The University of Sydney

Henry Leung

University of Sydney Business School; Financial Research Network (FIRN)

Artem Prokhorov

University of Sydney Business School; Saint Petersburg State University; University of Montreal - Centre interuniversitaire de recherche en économie quantitative (CIREQ)

Date Written: October 31, 2020

Abstract

We design an adaptive framework for the detection of illegal trading behavior. Its key component is an extension of a pattern recognition tool, originating from the field of signal processing and adapted to modern electronic systems of securities trading. The new methodology combines the flexibility of dynamic time warping with contemporary approaches from extreme value theory to explore large-scale order book data and accurately identify illegal trading patterns without access to any confirmed illegal transactions for training. The method is shown to achieve remarkable improvements over alternative approaches in the identification of suspected illegal insider trading cases in a high-frequency dataset provided by an international investment firm.

Keywords: Market Manipulation, Dynamic Time Warping, Market Microstructure, Machine Learning, Limit Order Books

JEL Classification: C02, C4, G14

Suggested Citation

James, Robert and Leung, Henry and Prokhorov, Artem, A Machine Learning Attack on Illegal Trading (October 31, 2020). Available at SSRN: https://ssrn.com/abstract=3722391 or http://dx.doi.org/10.2139/ssrn.3722391

Robert James (Contact Author)

The University of Sydney ( email )

University of Sydney
Sydney, NSW 2006
Australia

Henry Leung

University of Sydney Business School ( email )

402, H69
The University of Sydney
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Artem Prokhorov

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Saint Petersburg State University ( email )

7-9, Universitetskaya nab.
Saint Petersburg, 199034
Russia

University of Montreal - Centre interuniversitaire de recherche en économie quantitative (CIREQ) ( email )

3150, rue Jean-Brillant
Montreal, QC H3T 1N8
Canada

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