Security of financial systems (FinSec) is a serious and growing global challenge.
To help tackle this, Imperial College London has appointed Dr PJ Beaghton as Professor of Practice in the Department of Computing and Associate Director of the Institute for Security Science and Technology (ISST). This builds on his previous role as Honorary Principal Research Fellow with the ISST, engaged in FinSec research, and Co-Lead of the Imperial College FinTech Network.
PJ has significant experience in finance. He founded and managed a global statistical arbitrage hedge fund for 12 years, after working as a senior quantitative trader and Managing Director at Salomon Brothers in London. He also holds a PhD in Chemical Engineering from Princeton University.
We found out a bit more about FinSec and PJ’s plans.
Hi PJ, what inspired you to join the Institute for Security Science and Technology?
Throughout my career in finance, I have always enjoyed tackling challenging problems in computational and quantitative finance, so joining the ISST and Imperial College to develop a FinSec research activity was a natural next step.
The Institute is already an interdisciplinary research leader in many areas of critical infrastructure security, so I felt that it would be an ideal incubator for a research programme in the security and integrity of financial systems.
What are the main challenges in financial systems security you specialise in?
Trading financial instruments increasingly involves algorithms that generate, disseminate and manage electronic trade orders with minimal or no human involvement.
The sheer volume and speed of such trade order flow exposes the financial system to serious risks. For example, a software glitch or human error might generate unsupervised rogue orders which remain undetected long enough to create a market shock. This happened in the 2012 Knight Capital “technology breakdown”, where 4 million rogue orders led to a $450 million loss in under 45 mins.
Rogue orders can be generated accidentally, or potentially be caused by a physical or cyber interference by someone aiming to generate financial gains or cause disruption. Either way, if they are not intercepted early enough, their effect may also spill over to other financial markets and cause major systemic disruption.
The complexity of the capital markets and recent advances in financial engineering are also being exploited by criminals for illegal activities such as money laundering and tax evasion.
These transactions often take place in various currencies, across several geographic locations and exchanges, using multiple financial instruments such as stocks, bonds, derivatives, commodities and foreign exchange. This makes them very difficult for bank compliance departments, regulators and law enforcement to identify.
How can we counter these threats?
One priority is to develop sophisticated anomaly detection tools that consider the interconnectedness of the financial markets and intercept rogue orders routed to financial exchanges before they cause system-wide contagion. This is critical to the integrity of the financial system and the profitability, in some cases even the viability, of financial institutions.
To counter illegal activities like money laundering, we can explore the development of adaptable machine learning algorithms that incorporate codified know-how of financial market experts. This approach will help identify and intercept illicit financial transactions that would otherwise go undetected due to their complex and multifaceted nature.
What are the plans for FinSec at ISST?
In addition to our current research initiatives focusing on the threats to capital markets mentioned above, the ISST is well positioned to promote research across the entire FinSec space, involving the security of all financial systems, institutions, processes and services.
As Imperial College’s interface with industry and government in the security space, the ISST can help convene and leverage relevant expertise across Imperial College, such as in Big Data, Cryptocurrency, Cyber Security, Machine Learning, AI, Quantitative Finance, and the Business School. This would enhance relationships with financial institutions and agencies, and lead to involvement in research projects that span not just FinSec, but all areas of financial technology and engineering.
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Reporter
Max Swinscow-Hall
Institute for Security Science & Technology
