The Hong Kong stock exchange is deploying artificial intelligence to detect unusual trading activity, as it steps up efforts to root out stock price manipulation and market abuses.
Hong Kong Exchanges and Clearing is the first exchange in Asia to roll out the surveillance software created by the US technology and exchange group Nasdaq, which uses artificial intelligence to help predict unusual trading activity.
The software analyses historic trading activity to identify patterns and anomalies, such as dramatic rises in trading volumes or wild swings in share prices. It then combines this with the exchange analysts’ historical assessments of trading data to determine which areas to monitor.
“New technology, such as high-frequency trading and cryptocurrencies, make trading increasingly more complex,” said Tony Sio, head of exchange and regulator surveillance at Nasdaq. “Rather than winding back the clock, exchanges must themselves make use of advanced technologies to ensure that markets are safe.”
Garbo Cheung, head of market surveillance and monitoring at HKEX, said the exchange is aiming to be at the fore of using “emerging technologies” to ensure the market functions properly and to safeguard investors.
Stock exchanges globally are implementing artificial intelligence and turning to so-called regulation technology, or “reg-tech”, to stamp out market abuses. The Nigerian Stock Exchange also implemented this software last year.
This is a great market. You don’t want the regulator to solve all your problems
The HKEX initiative comes after a string of small-cap companies last year simultaneously plunged in price, with some dropping as much as 90 per cent, sparking concerns over possible market manipulation.
The adoption of AI is part of a “regular system upgrade, which does not reflect any increased threat of market manipulation or related to a change in the level of regulation”, the exchange said in a statement on Monday.
The so-called enigma network of companies, uncovered last year by corporate governance expert David Webb, were found to be interconnected through opaque holdings in each other.
But the incident involving the enigma network is just one example of a number of episodes of wild stock swings. Following a bout of stock market gyrations last year, Charles Li, HKEX chief executive, likened the market to a city that is reasonably well-run “has a few dark alleys and little corners”.
He added: “This is a great market. You don’t want the regulator to solve all your problems.”
The exchange is paving the way for a series of changes to allow riskier companies, such as biotechnology groups that have yet to generate revenue, to list on the market.