If you are chief compliance officer at a firm – brokerage or fund – what if you could tell if the customer or one of your traders was about to do something bad, wrong or illegal? The operative words are “about to.”
Chicago-based start-up Neurensic says its can do this now using artificial intelligence technology to identify behaviors that could threaten a firm’s well-being and prevent that firm, bank or broker from incurring regulatory actions that trigger hefty fines. Last fiscal year, the Commodity Futures Trading Commission reported a record $3.14 billion in civil monetary penalties with a focus on spoofing, market manipulation and supervision lapses. It fined Deutsche Bank $800 million last year, its largest penalty ever, for LIBOR manipulation.
Listening to Neurensic CEO David Widerhorn talk about how artificial intelligence and machine learning can take all the data a firm produces, identify behaviors of users of those systems and then notify compliance officers that one of those traders is likely to do something stupid, wrong or criminal, you get the feeling that this is the way this industry is going. Some would say, it needs to go here.
Almost weekly, we see stories on a trader or trading group doing something that only catches the bank or regulator’s attention long after the damage is done. Neurensic says its technology not only can work with the legacy trading and data systems that most firms use, but also bend and adjust to regulations as they too change. Neurensic has been working with Advantage Futures since its inception last year. And with an updated and broader offering for US and European regs coming up, Widerhorn said there are more firms and banks ready to follow. The firm has grown from just five founding members to 25 last November to 50 today. Besides the Chicago office, it has opened a Hong Kong office and plans to open an office in Silicon Valley, and expand its staff to 100 by year end.
Next up, the firm is looking at applying its technology to the operations side of the FCM and banking business. It is in talks with 10 banks to collaborate with Neurensic on building a system that dives deep into their operations and examines the costs, revenues and risks with each customer. While this seems simple enough right now, Neurensic believes the current revenue, commission and sales models are so rigid they are preventing firms from maximizing profits, minimizing risks and keeping track of crucial capital requirements. The goal is to work with that consortium of banks, fierce competitors that at one time would never collaborate on well, anything, to develop a customizable solution that fits their various business models.
Comparisons to Minority Report aside, Widerhorn believes this is key for the industry, which is faced with a massive regulatory overhaul and strong profitability headwinds, and AI and machine learning technologies can create solutions that continually adjust and are “future proof.”