I was pleasantly surprised this morning to see a WSJ article that suggests the SEC is beginning to use the tools of Quantitative Research in its enforcement: SEC Ups Its Game to Identify Rogue Firms. This is a positive step for enforcing the laws governing markets.

Recall 3 years ago, we asked if the SEC did Quantitative Research?

“I would suggest to the incoming head of the SEC to put together a blue ribbon of math professors, quant scientists and algo specialists to develop a few basic programs that ferrets thru market, options, and performance data looking for aberrational data series, and leading to criminals and fraud artists.”

Then again two years ago, during the option backdating scandal, we noted the advantages of using quant tools for law enforcement:

“It also points out the need for the SEC to develop a Department of Quantitative Analysis filled with math geeks and computers, doing nothing but sifting through data looking for investor fraud. I’d bet they would get more convictions than the rest of the SEC combined. (If someone in the SEC would call me, I’ll help you set it up).”

Mathematics provides an ability to sift through mountains of data to find anomalous results — whether you are looking for Alpha or Felons,  it matters not.  I am pleased to see that the SEC is adopting useful, cost-effective techniques. The bottom line is that the prosecutors whoa re charged with enforcing the rules have not been using the most current tools of the trade.

If this process continues to change — prosecutors actually pursuing criminals — perhaps we might begin to see investor confidence return to markets. Yes, this is only a small step — real improvement remains a long way off. But the camel’s nose is now in the tent, with more enforcement tools to follow.

click for larger graphic


Does the SEC Do Quantitative Research ? (December 13th, 2008)

Mathematical Proof: Companies Manage Earnings (February 13th, 2010)

SEC Budget vs Wall Street Spending (March 9th, 2011)

SEC Ups Its Game to Identify Rogue Firms
WSJ, DECEMBER 27, 2011

Category: Legal, Quantitative, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

5 Responses to “SEC Goes Quant”

  1. Doofus says:

    It’s certainly encouraging that the SEC is investigating and using newer methods to ferret out the frauds.

    But for this:

    The SEC accused Mr. Kapur of continuing to report positive returns for the hedge fund even after it was liquidated and ceased trading, as a way of attracting investors to his other funds. Mr. Kapur also repeatedly inflated his firm’s assets under management in investor reports and invented a nonexistent management team, the SEC alleged in its civil-fraud suit.

    you don’t need complex quantitative analysis or expensive computer systems to run the algorithms.

    Bottom line is that they have dropped many balls. The fact that they are slowly trying to catch up with modern techniques in a tiny number of cases is simply inadequate.

  2. bear_in_mind says:

    Earlier this year, Barry printed a quote from James Carville stating that if the Obama Admin didn’t prosecute the financial criminals on Wall Street, he’d lose the 2012 election. If only more pundits from both all sides of the socio-political spectrum would demand the same.

    But I have to agree with Doofus here. It’s more intention and attitude than having a CSI ‘whiz-bang’ toolkit. Eliot Ness didn’t need computers, algorithms (cue the Taco Bell chihuahua: “What’s an algorithm?”) and HFT sniffers.

    Don’t get me wrong: I’m not against the application of high-tech, but if all the data is going to sit in SEC/DOJ file cabinets, what’s the point, really?

    Also, see Judge Rakoff’s recent rebuke of the SEC’s modus operandi of settling litigation without admission of guilt. Has the SEC really turned over a new leaf? Color me skeptical, but hopeful.

    If our hard-earned money is being used to equally enforce laws, regardless of class or status, I think citizens would feel a lot more sanguine about the price we pay. And it couldn’t be more timely given today’s announcement the White House is seeking an increase of the debt ceiling by another $1,200,000,000,000.00 (to $16.4 trillion) to keep the U.S. government running through Dec. 31, 2012.

  3. Sechel says:

    They could start with Benford’s law…

    I recently joked to some colleagues that year’s ago i was reviewing and comparing insurance stocks for my personal portfolio. This goes may years back, but on just about every metric AIG looked far better than my second runner up CHUBB. The joke was that in hind sight, the company that outperformed substantially was usually an accident waiting to happen. Another company that fit this bill(which I did not buy was Enron).

  4. sabre_jenn says:

    I am sure we have seen sequel to this movie before… yes, in the 9/11 commission report.

    Executive summary: Government bureaucrats over reliance on technology and gadgets, and don’t “connect the dots”.

    The SEC was sent boxes of evidence about Madoff years before he was “caught” / turned himself in laughing. The SEC didn’t need fancy computers or quant systems, they just had to stop looking at porn websites.

    None of the journalism majors (not exactly a quant major) had any trouble seeing that Goldman Sachs had blatantly misrepresented the loans in the Abacus CDO deal. While I agree with Mr Ritholtz that a quantitative screening system might help the SEC identify suspicious activity to follow up on, that is clearly not the problem at the SEC. Basic enforcement actions are lacking. When they do happen, they are obviously targeted at “the little guy”, while politically connected big fish get a slap on the wrist at worst. I don’t like Martha Stewart, and I am happy to see the SEC kept the world safe from overpriced holiday decorations. But come on. How can anyone take the SEC seriously when they lock up Martha but they don’t lock up Blankfein or Corzine or Fuld or Henry Paulson or Angelo Mozillo or Ken Lewis?

    If we had real enforcement at the SEC, then absolutely a quant system would be a great tool.

    The SEC’s prosecutors are just political hacks. Technology won’t fix that.

  5. sabre_jenn says:

    PS — when will Federal prosecutors and/or Congress indict Ben Bernanke for perjury?

    Gerald O’Driscoll pointed out what everyone already knows: Bernanke is bailing out European banks with his illegal currency swaps

    Not only is this vastly outside the Fed’s mandate (and thus illegal) — it also 100% contradicts his statement under oath to Congress that he was not going to use Fed resources to bail out Europe.

    I know this isn’t really an SEC issue per se — but I don’t see the point in debating fancy gadgets for regulators when the regulators themselves are so blatantly ignoring written law.

    If Geithner and Bernanke (and Hank Paulson) don’t have to obey any laws, why do we have laws?