Case Study: 2015 SEC Fine Against UBS ATS

This year’s $14 million settlement between the US Securities and Exchange Commission (SEC) and UBS over allegations of misconduct in design, marketing and implementation of their ATS (dark pool) highlights the financial services industry’s ongoing struggles with the staggering (and growing) complexity of trading algorithms.

We demonstrate how UBS can leverage AI’s groundbreaking formal verification technology to help prevent further regulatory fines related to the design and implementation of UBS dark pools.
Powered by recent breakthroughs, our product Imandra is able to automatically prove properties of fairness and best execution of venue designs and test production implementations with unprecedented rigour. We demonstrate how Imandra can automatically detect and test for key recent issues raised by the SEC.

Furthermore, based on UBS’s publicly available Form ATS filing, we apply Imandra to highlight additional potential issues with UBS’s current dark pool design. Finally, we discuss applications of Imandra to a wide range of financial algorithms, including routing systems and smart contracts.

Transparent Order Priority and Pricing

Transparency of trading algorithms is a pressing issue in today’s financial markets. For example, though a dark pool may have access to a client-specific information, can it ever use that information to affect order priority or pricing in a manner not reflected in regulatory filings and marketing materials?
Many such questions are difficult (if not impossible) to answer by looking at post-trade data alone. Fortunately, recent scientific breakthroughs allow us to systematically analyse algorithms for compliance and conformance with regulatory directives and marketing materials.

Our product, Imandra, leverages latest research breakthroughs to deliver an automated formal verification solution for designing, implementing and regulating financial algorithms. Imandra reasons about precise statements concerning the behaviour of trading algorithms, giving the industry and regulators unprecedented insight into what trading algorithms can and cannot do.

In this report, we illustrate Imandra’s application to the transparency of order priority and pricing within venues.


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Creating Safe and Fair Markets

Many deep issues plaguing today’s financial markets are symptoms of a fundamental problem: The complexity of algorithms underlying modern finance has significantly outpaced the power of traditional tools used to design and regulate them. When it comes to exhaustively reasoning about the behaviour of complex algorithms, the only viable solution is formal verification, the use of deep advances in mathematical logic to automatically reason about algorithms and prove properties of programs. Aesthetic Integration is bringing formal verification to financial markets for the first time. In this white paper intended for the wider financial industry, we present our vision for the design and regulation of electronic financial markets empowered by formal verification.

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