Fairer markets from smarter insights

Fairer and more efficient markets

Research work of the most intricate and demanding nature is needed to truly understand financial markets, their flaws, and improving regulation. These ideas are at the core of the Fairer More Efficient Markets project.

For Professor Aitken, it has also led to appearing in court, as an independent expert in proceedings involving insider trading and market manipulation. The work began through the team building the SMARTS market surveillance system, subsequently sold to Nasdaq in 2010, and progressed to using the technology in actual court cases. The SMARTS system enabled the marketplace to be replayed, and more importantly, visualised.

“It’s one thing to talk about theory, but it’s another matter entirely when a party goes to gaol if you don’t do your job appropriately,” he says.

PhD students working with Professor Aitken and Professor Vito Mollica work closely on intense analysis of financial market movements, with access to technology and analytical tools to be able to replay financial markets, as far back as 1991, at a nanosecond level.

This way they can spot patterns consistent with insider trading or other market anomalies.

“It’s a very practical way of using research,” Prof Aitken says, and it has also led to several students earning PhDs for their involvement and the contribution of background research on particular court cases.

“If you can recreate markets, you can also study particular incidents and teach students how they occurred and more generally how markets work,” Prof Aitken says.

Although these activities fall under the banner of applied finance, it’s a specialised area of finance know as security market microstructure, or optimal securities market design.

Prof Mollica says the movement towards decentralised markets from centralised ones has driven rapid change in the sector, and their work also represents an alignment between government and industry for innovative and efficient ways to maintain regulation.

“A lot of wonky things are happening because these new markets are essentially unregulated,” he says, citing the turmoil in crypto currency values.

Their work is conducted through the RoZetta Institute, which has evolved since Prof Aitken was involved with establishing its predecessor 20 years ago, the Capital Markets Cooperative Research Centre.

It has a history of innovative collaborations and commercial solutions that might not normally be the conventional approach to regulatory change, which includes the SMARTS Market Surveillance System, now valued at more than $US1b, and which has contributed significant taxes to the Australian Government through the creation of more than 500 high-tech jobs.

RoZetta was established in 2019 with the support of the NSW Office of the Chief Scientist and Engineer, with investment through the Research Attraction Acceleration Program (RAAP). The industry focus of RoZetta has helped translate government research and develop their investment into sophisticated data analytic capabilities, resulting in significant commercial gain. As an example, the Rozetta Institute now has an endowment of about $35m used to fund the creation of other industry centres, the latest being the Digital Finance Cooperative Research Centre.

“RoZetta specialises in data management, mining and visualisation, collecting and curating both traditional and non-traditional data to build commercial solutions that allow compliance officers to monitor the fairness and efficiency of markets whether that be securities, health or energy markets,” Prof Aitken says.

“SMARTS Broker is a commercial spin out that provided this service for brokers participating in stock exchanges. This way, instead of only regulators monitoring market fairness, hundreds of compliance officers also now are able to monitor market fairness significantly enhancing self-regulation of the marketplace in the process.”

Other activities include a unique program of translational research via industry-funded PhD projects. The PhD candidates work on site with their industry sponsors accessing proprietary data which often makes their research both unique and commercially valuable.

“The creation of digitally enabled commercial solutions is based on the results of their research. RoZetta then develops sustainable commercial enterprises, and its PhD students usually go on to become employees,” Prof Mollica says.

The success of this approach has been estimated by the NSW government at $1.8b, a large part of this being tax paid by the new enterprises and their employees, with the returns to government in the form of taxes being approximately six times the total research funding received from state and federal governments since inception of the project 21 years ago. It has produced 190 PhD graduates, and answered about 2,500 industry questions. One of the key successes is the TRTH platform built for Refinitiv, a financial market data archive used by 90% of the world’s banks and valued at more than $2b.

“This was developed to help academics do their research but became commercially valuable to Refinitiv. It ended up funding the centre for many years before it was sold back to Refinitiv,” says Prof Aitken. The team also took the ideas from surveillance of securities markets and translated them into the surveillance of health markets through a business, Lorica Health, that subsequently sold to a US venture capital fund.

The commercialisation pathway pioneered by RoZetta is being applied to other markets and sectors, including the health insurance industry, energy markets and asset management marketplaces.

The RoZetta Institute team includes Professor Vito Mollica, Associate Dean Higher Degree Research, Macquarie Business School, Professor Mike Aitken, founder of CMCRC, and Professor Andrew Lepone, Chief Research Officer of the RoZetta Institute and Professor of Finance at Macquarie University. Also involved was Professor Mary O’Kane, a company director of CMCRC, and NSW Chief Scientist and Engineer, 2008-2018.