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.
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.''
The NYSE's latest refinement is Stock Watch II. This computer, still in the dry-run stage, will track each of some 1,500 stocks, searching for deviations from 24 different telltale figures.
Stock Watch II can look at block trading volume in a suspect stock or filter out block trades. It knows whether or not it is unusual for 2,000 shares to be traded at 11 a.m. on Wednesday. It can compare today's trading with an average price for the last 5, 10, 20, or 30 days. Analysts constantly rejigger the setup to get the most sensitive price and volume profile.
Whereas Stock Watch I could flag a stock only once a day and only based on unusual point moves (not very handy if the entire market is up strongly), Stock Watch II will identify aberrations on a percentage basis in a stock price. This is the same principle the American exchange's SWAT system works on.
``Stock Watch II can identify truly aberrational trades, because now we can develop more specific profiles of each stock's trading history,'' says Ms. Gautier.
For example, if the price of XYZ stock jumps 3 percent above its 30-day moving average, it may trigger a pink alert (the new system has four levels of sensitivity: blue, yellow, pink, red) to NYSE analysts. How the detection works
If there's no news on the wires about the company, then Stock Watch personnel call down to the trading floor and ask the specialist what the excitement is about.
Perhaps the specialist making a market in XYZ is getting hit by buy orders from Prudential-Bache brokers because an analyst just put out a favorable report. Nothing suspicious there.
But if the specialist doesn't know what's up, the exchange calls the company. Suppose XYZ just completed a merger deal with PDQ. Maybe the trading is coming from an attorney, or a director is jumping the gun on the public announcement.
Still, the exchange does not know yet if it was an insider or someone else doing the trading.
That's were another computer comes into play. The Intermarket Surveillance Information System (ISIS) tracks every options and stock trade made on the eight major US exchanges and the over-the-counter market.
ISIS provides the audit trail for analysts to follow. It shows, for instance, that 10,000 shares of XYZ stock traded at $30 a share at 10:03 am on the NYSE. It names the floor broker who handled the trade, the brokerage that placed the buy order (for a customer or company account), the firm that sold it, and the clearinghouse that checked the accuracy of the sale.
Once the Stock Watch analysts have the customer names, they have to track down some connection to XYZ company to indicate possible insider trading. That's where yet another system gets the nod. Tracking 700,000 executives
In 1985, the NYSE plugged in its Automated Search and Match (ASAM) computer.
This machine stores Standard & Poor's data on 75,000 companies and 700,000 corporate executives. ASAM keeps track of membership in social clubs, ZIP codes, college affliations, family members, and organizations.
And last October, ASAM learned how to build selected data bases for cross-checking suspected insiders.
For instance, XYZ merges with PDQ. Stock exchange analysts think think several individuals may have traded on inside information. Overnight, ASAM will build a tree of all executives and directors at just these two companies.
Then ASAM will look for any connections between Wily Williams, one suspected insider, and officers at XYZ and PDQ. It may discover that Mr. Williams and Sam Knowit, an accountant at PDQ, both belong to Hidden Assets Country Club. It can develop several levels of these specific data bases, making it easier for analysts to make connections.
But ASAM contains only Standard & Poor's and National Registry data. Gautier hopes eventually to put other often-used sources - such as Who's Who in America or The Martindale-Hubble Law Directory, a list of American lawyers - onto ASAM.
Meanwhile, the American Exchange has no computerized cross-reference data base and no plans to build one now.
Still, Dingell's aides say the GAO's chief complaints are not likely to focus on computer detection. Flaws will be noted. But the quality and quantity of exchange investigators, policing efforts at brokerages, and the adequacy of SEC resources are likely to draw the GAO's fire. Dingell's subcommittee will hold a hearing on this issue late this month.