Intel's Pentium Bug Fix Is Proposed as Solution for Dark PoolsBy
Company was founded by mathematician and former trader
UBS was fined $14.4 million for dark-pool violations
Modern markets are driven by software algorithms that humans struggle to debug. To stamp out problems, financial regulators should use the same technique Intel Corp. has deployed following an infamous chip crisis in the 1990s, according to a London-based technology firm.
Rather than only providing pages of text describing their trading systems, dark-pool operators should give regulators mathematical models that show precisely how they work, Aesthetic Integration Ltd. told the U.S. Securities and Exchange Commission in a letter last week. The code could then be examined with formal verification.
The company has demonstrated its system using UBS Group AG’s dark pool and said its method for checking a venue’s documentation against the actual trading would find more discrepancies more quickly than existing approaches.
“The complexity of financial algorithms has significantly outpaced the power of traditional tools used to design, implement and regulate them,” according to a white paper attached to the letter to the SEC. “A typical regulatory filing or marketing material is presented in English prose in a manner unfit for automated processing and analysis.”
UBS gave Aesthetic Integration a $50,000 prize in its Future of Finance Challenge last year for applying formal verification to finance. The bank said on its website that it awarded Aesthetic Integration for its system that “automatically analyzes financial algorithms for glitches.”
A representative for UBS declined to comment.
Finance is next
Intel, which had to replace flawed Pentium processors in the 1990s, now uses formal verification to test for bugs before putting its microchips into production. The aviation industry uses the approach to vet air traffic control systems. Aesthetic Integration argues that the financial industry should be next.
The pitch comes as banks have been beset by fines. UBS was fined $14.4 million by the SEC for problems at its private stock-trading platform. Barclays Plc and Credit Suisse Group AG racked up more than $154 million to settle allegations that they misled investors about how their dark pools were managed. Investment Technology Group Inc. agreed to pay $20.3 million for its infractions.
Aesthetic Integration was founded by Denis Ignatovich, formerly head of the central risk trading desk at Deutsche Bank AG in London, and Grant Passmore, a mathematician and expert on formal verification.
Passmore said formal verification uses algorithms to analyze other algorithms. Rather than endlessly trying to test possible outcomes, machine reasoning acts like an automated mathematician, creating proofs and theorems to speed up the work.
The SEC is currently reviewing what market operators disclose about their alternative trading systems, or ATSs, also known as dark pools.
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