In vigil on inside trading, computer blips upstage human tips
A deep metallic voice pierces the staccato chatter of wire service machines. Jay S. Bono, director of the American Stock Exchange's ``Stock Watch'' system, stops in mid-sentence. ``C-N-J,'' drones an electronic monotone.Skip to next paragraph
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A small computer in the corner dubbed SWAT (Stock Watch Alert Terminal) has caught a whiff of something unusual. Perhaps it's a surge in volume, a major sell-off, something.
Mr. Bono looks at a printout; ``8,300 shares at 14,'' he mutters. He wheels and punches a few keys on a nearby terminal. The last two days of trading in Caesars New Jersey pops up on the screen. Trading is heavier than normal, the price is up sharply.
Bono pounds the keyboard, demanding the latest news on the stock. Scanning the screen, he visibly relaxes.
``They reported very good earnings yesterday - 18 cents versus 7 cents last quarter,'' he says. ``That's why it's up.''
Three years ago, SWAT spotted trading aberrations in two stocks: TIE Communications and Key Pharmaceuticals. American Stock Exchange (AMEX) analysts started digging. They discovered a strong correlation with these and other stocks written about in the Wall Street Journal's daily market column. Ultimately, Journal reporter R.Foster Winans and a Kidder, Peabody & Co. broker were snared for insider trading.
Similar electronic snoopers at the New York Stock Exchange picked up 22 unusual trades by Bank Leu and Dennis Levine. And it red-flagged 47 stocks traded by Ivan Boesky between 1983 and 1986. Could system be beaten?
Yet Congress has criticized the Securities and Exchange Commission and the stock exchanges for failing to make cases against Mr. Levine or Mr. Boesky without a tip or an informant.
``Had a tip not been forthcoming, this [insider-trading] network might still be operating,'' remarked Sen. Donald W. Riegle (D) of Michigan at a Senate hearing last week. ``Something hasn't been working. Has our system of monitoring been sufficient? I think you have to reach the conclusion that it hasn't.''
And Rep. John D. Dingell (D) of Michigan has the General Accounting Office (GAO) working on a study of the entire market policing process. In a preliminary report given at a hearing in December, William J. Anderson, assistant comptroller general, criticized the exchanges' surveillance efforts. He cited the need to upgrade and improve the accuracy of trading data.
The GAO will not comment further on the study in progress. But Mr. Anderson did say at the hearing: ``With a little bit of planning, I could devise an approach that would probably beat the system.''
Maybe so, says Stephen L. Lister, senior vice-president of compliance at the American Stock Exchange.
``If you're going to buy 100 shares on inside information, you could probably get away with it,'' he allows. ``But people looking for a handsome profit aren't going to make it on 100 shares. And patterns of small share purchases can be detected.''
SEC officials, who rely on the exchanges to spot market miscreants have few complaints. In 1986, the New York Stock Exchange's system tagged some 9,000 stocks, prompting just over 100 insider trading investigations; some 40 were forwarded to the SEC. Monitors have been refined
``Detection isn't the problem,'' says Richard V. Norell, head of the SEC's market surveillance office.
``Over the years,'' he notes, ``the exchanges have made a lot of improvements. Who's to say they can't be better? But a computer alone can't make the case. People have to put the pieces together and do the follow-up.''
As for the GAO criticisms: ``The accuracy of our audit trail is extremely high,'' says Agnes Gautier, vice-president of market surveillance at the NYSE.
``We can always improve our systems, and we constantly are,'' she notes. ``But if you look at the SEC inspection reports over the years, every time a criticism is made it's always followed by `And, baby, you've come a long way.'''
But a member of Mr. Dingell's staff who is familiar with the GAO investigation complains that ``the SEC and the NYSE are kissing up to each other. The NYSE keeps saying it's as good as the AMEX. But AMEX has the superior system and it's been on line for years. The [comparable] NYSE machine still isn't operational.''