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The Data Detective

Credit: PM Prize/Wildbear

Michael Aitken received the Prime Minister’s Prize for Innovation in 2016. Credit: PM Prize/Wildbear

By Ann Leduc

Michael Aitken made his name developing software to detect stockmarket fraud, and now believes he can save the health sector $20 billion by detecting fraud and waste.

Many Australians invest their savings on the stockmarket, and trust that the stockmarket will give them a fair go. They may not realise that their nest egg is being watched over by technology developed right here in Australia.

Now owned by Nasdaq, SMARTS is the dominant software for market surveillance. It’s used by more than 55 national exchanges and regulators as well as 120 international brokers across 50 countries. This is Australian technology helping Mom and Pop investors the world over, and it’s only one of four technologies developed under the leadership of a very unconventional academic, Michael Aitken, Professor of ICT Strategy at Macquarie University and CEO of the Capital Markets Cooperative Research Centre (CMCRC). Aitken dedicated his life to making markets fairer and more transparent and, in the process, is reinventing how academics do their work.

Reflecting upon his award of the 2016 Prime Minister’s Prize for Innovation, Aitken said he was struck by the similarities between his experience and that of Prof Richard Shine of The University of Sydney, who won the 2016 PM’s Prize for Science for his research on cane toads: “Richard pointed out that he was amazed how simple fieldwork could trump sophisticated labs and equipment, and I empathise with his point,” he said. “At the heart of my work was the simple recognition that pre-existing theories of how the securities markets worked were quite inadequate, and to rectify the situation I found myself, like Richard, with no choice but to go down to the marketplaces and try and figure out how in fact they operated.”

Aitken had second thoughts about approaching the Australian Stock Exchange for fear he was the only academic who didn’t actually know how the marketplace operated, and instead found himself welcomed as the first academic to bother to ask such questions. He found himself prodding organised chaos. The markets had been fully automated to make them more competitive, and Aitken was shocked to discover that market design changes, like the introduction of competition or algorithmic trading, were being made without any evidence about was working and what wasn’t. He claims the genesis of SMARTS arose from a very docile statement he made one day that “since the market is fully automated, it might be possible to replay trading circumstances of today, tomorrow”. This was met with sneers.

Two of Aitken’s students claimed they could write a program if he could get the data from the reluctant exchanges, so he convinced a visionary senior executive in Reuters, Mr Herbie Skeete, to provide it. So extensive was the data at the time that it had to be flown out to Australia on Qantas each month in huge boxes of magnetic tapes.

Five years later, the trio had built a prototype of what subsequently became known as the Thomson Reuters Tick History product, which today ingests two million transactions each second from every securities market in the world and makes it available to commercial clients within 20 minutes. This outcome was important for Reuters as it earns the company approximately $100 million per annum, but for Aitken the task was more idealistic. He wanted to be able to investigate the impact of market design changes in any market of the world, and he had the first piece of the puzzle. He founded the Securities Industry Research Centre of Asia-Pacific to deliver the Thomson Reuters data to all academics across Australia and New Zealand.

He now out set out to recreate the market, trade by trade, order by order, second by second, and noticed things like prices running up just before takeover announcements – a classic pattern of insider trading.

Notwithstanding this work in market surveillance, Aitken’s real quest was for a way to enable evidence-based policy-making in financial markets, a task that remained unsolved until last year when he launched the Market Quality Dashboard (https://www.mqdashboard.com). He reached that goal by establishing a partnership between industry and academia through the CMCRC, and in the process built a powerhouse of industry-focused PhDs.

This partnership arose from the realisation that most of Aitken’s own PhD studies had been spent getting data, building metrics and doing statistics. He realised he had what he needed to build a service that would provide the metrics that were typically part of major academic articles, run them against the data and make them available to any PhD who wanted them.

This service would be very valuable to industry partners because it would enable anyone, including PhD students, to study market design changes in any market of the world in a matter of minutes. For example, US securities markets recently undertook one of the most important market design changes ever contemplated. The Securities and Exchange Commission (the US securities regulator) has promised an interim report within 18 months, yet the Market Quality Dashboard can provide these results on a 5-day rolling basis.

In his lifelong process of solving one problem after another, and building on the opportunities afforded by the solutions, Aitken has solved the problem he encountered 25 years ago when he first went to the securities marketplace. “It only took me 25 years, but what a lot of fun I had on the way!” he says.

To ensure it wasn’t a fluke, he’s applying his technology and know-how to other markets such as health and mortgages – two markets as fragmented as financial markets. He says there are billions of dollars of potential savings in health expenditure in Australia that can be used to bring significant improvements to consumers’ health.

Aitken has now spun-off a separate entity, Lorica Health, which is using software-based surveillance to detect fraud, abuse, waste and errors in Australia’s mammoth and fragmented health sector. Early indications are that there are savings worth billions of dollars per year that could then be directed to areas of service that would deliver huge health dividends to the country. “One of the more important opportunities here relates to the efficacy of health intervention itself,” he says. “This requires an evidence-driven approach to identifying which treatments deliver improved quality of life to patients, and which don’t. So here we are looking at maybe $20 billion per year that could be directed to improve healthcare in areas of genuine want.”

Looking at everything that was created step by step, it’s an ecosystem of companies that provide 200 permanent jobs and contribute $6 million in tax revenues each year. Using funds from the sale of SMARTS to Nasdaq in 2010, Aitken and his teams have now invested in mortgage markets (www.dealmax.com.au), the café and restaurant supply chain marketplace (www.ordermentum.com), the building management market place (www.cimenviro.com) and the digital exchange and currency marketplace (www.digi.cash). Their ultimate goal is to fully replace government funding and secure a powerhouse of 100 permanently PhD students (and associated infrastructure) who will underpin innovation in Australia for decades to come.

This is a reinvention of academia as Aitken convinces his peers to come out of their ivory towers and plunge right into the microstructure of markets. They should not fear: the calibre of the research is such that academics associated with the CMCRC have published 122 articles in the top 12 journals in the field over the past 5 years, a major achievement for finance researchers.


Ann Leduc is the Head of Regulatory Practice at the Capital Markets Cooperative Research Centre.