NYSE Has Market Surveillance Prototype; Development Plans Call For Use Of Cray

There's a 24-inch satellite dish on the roof of the New York Stock Exchange, but it's not being used by any of the specialists or brokers inside. The PC Quote, Inc. satellite data feed terminates in a cluster of high performance workstations in the market surveillance section of the exchange.

The surveillance project using the feed is applying artificial intelligence techniques to search for "aberrational volatility behavior," says Jack Walsh, senior vice president at PC Quote.

NYSE sources confirm that the 19.2 kilobits/second feed is delivering futures, options and underlying stock prices for use in a variety of multiple-market analyses intended to identify stock price manipulation.

The feed is driving Sun 3/280 workstations which have been used to code and run surveillance programs written in Prolog. Market data is applied to pattern-matching and cluster analyses aimed at detecting suspicious statistical "outliers," according to sources.

The project was initiated several months ago at the height of the insider trading scandals and is primarily intended to alert exchange officials to the possibility of stock price manipulation.

It's bad news for the bad guys when self-regulatory organizations start using Cray supercomputers to police their markets.

While the NYSE hasn't made an official commitment to purchase a Cray, sources at the exchange say Cray timesharing tests are tentatively booked within the next three months.

So far, the NYSE's surveillance effort has only used subsets and samplings of market data to formulate the algorithms that will identify illicit trading anomalies.

If and when the intermarket surveillance system is fully implemented, it will perform real-time analyses on every tick, and every bid and offer, for every NYSE stock and all associated futures and options.

The NYSE isn't the first exchange to consider an investment in supercomputing radar. International (London) Stock Exchange planners have suggested that a Cray may be installed as part of their new central computing facility.

One of the six main recommendations reached by the Presidential Task Force on Market Mechanisms was that "information systems should be established to monitor transactions and conditions in related markets."

Mr. Brady will doubtless be gratified to learn that one such system already exists. The skill set needed for effective intermarket coordination and monitoring is being put into place at the NYSE.

Although the algorithms appropriate to intermarket monitors as proposed by the Brady report may be different from those in the NYSE surveillance project, the systems infrastructure and many of the underlying principles are the same.