By Emily Flitter and Sarah N. Lynch
NEW YORK/WASHINGTON Feb 26 The U.S. Securities
and Exchange Commission is beefing up its capacity to detect
insider trading and other illegal activity by engaging with
Palantir Technologies, a software company originally set up to
help foil terrorists.
The SEC has embarked on a multi-year deal, worth more than
$13 million, to use Palantir's technology to help the agency
crunch massive amounts of data, said John Nester, a spokesman
for the U.S. securities regulator.
Its partnership with Palantir is one of multiple "big-data"
projects the agency has initiated as it tries to narrow the
technology gap between regulators and Wall Street.
The SEC, with its $1.35 billion budget, has always grappled
with trying to keep pace with the industry, which is able to
outspend the regulatory agency on technology and pay higher
salaries to its experts.
Closely held Palantir was co-founded by Peter Thiel, the
billionaire tech mogul who also co-founded PayPal, the online
payment service now owned by eBay Inc.
The Palo Alto, California-based company's software has its
roots in technology that PayPal uses to detect fraudulent
transactions, and it takes its name from a magical stone in
J.R.R. Tolkien's epic "The Lord of the Rings" that can see
things not immediately apparent.
Officials expect Palantir's platform to help the SEC find
evidence of illegal activity more quickly and easily by linking
trading records and personal contact information from paid
databases with tips, complaints and referrals the agency has
The Palantir platform, while up and running for several
months, has yet to be rolled out to full capacity throughout the
Another big-data project designed to help SEC examiners
detect illegal trading activity -- the National Exam Analytics
Tool, or NEAT plus -- is scheduled to go live on March 1.
The NEAT plus tool uses a free database created by a U.S.
Navy contractor for missile defense systems and gives SEC
examiners the power to quickly analyze massive amounts of
trading data for brokerages and other Wall Street firms.
"Plus is the secret sauce - how we convert the data to
information," said Erozan Kurtas, an SEC quantitative analytics
expert who gave a presentation about the tool on Saturday at the
Practising Law Institute's annual "SEC Speaks" conference.
"All the hedge funds always talk about their secret sauce.
We finally have one, too."
The SEC declined to discuss more details of the project
beyond what has been said publicly, saying agency officials
still need to work through the details to make sure both the
systems and exams are not compromised.
THE POWER OF PALANTIR SOFTWARE
Members of the SEC's Division of Enforcement are using
Palantir's technology to look for incidents of insider trading,
pump-and-dump schemes in penny stocks, accounting fraud and
violations of the U.S. Foreign Corrupt Practices Act, among
The agency is already using analytical models and algorithms
developed in-house and run on software provided by SAS to find
suspicious activity in stock trading and other activities it
regulates. Palantir's contribution, according to the sources, is
to strengthen the connections between different sets of data.
While Palantir is a platform linking data sets, NEAT is an
analytical tool that can be applied to sift through the data for
patterns and other important observations.
With the NEAT project, Kurtas declined to say which
contractor created the database being used.
But he noted that because the database is free, the SEC was
able to essentially build NEAT in-house by utilizing existing
resources and avoiding spending millions of dollars for new
The SEC is one of a host of government agencies turning to
"big data" to improve their detection of suspicious activity.
Palantir works with other U.S. government agencies, including
the National Counterterrorism Center.
A spokeswoman for Palantir declined to comment.
The new platform is designed to let people working in
different divisions of the SEC more easily share discoveries
about companies and people that could help lead to more cases.
Sofia Hussain, a senior forensic accountant in the SEC's
Enforcement Division in Boston, said pattern-recognition tools
already have led to several new cases.
Palantir allows the SEC to compare the records of every
trade made in a particular stock, along with the identities of
those who made each trade, with addresses, phone numbers and
other personal information from paid databases. That enables it
to see more clearly relationships between all those trading in
the same stock.
The trend toward big data in white-collar enforcement has
reached the private sector, too. A new software vendor is
selling technology to hedge funds, pension funds and brokerage
firms that profiles traders, keeps track of their normal trading
habits and reports any suspicious deviations.
The company, AIMPaaS, began marketing its software three
weeks ago and is currently negotiating its first deal. Its
co-founder, Leslie Seff, said the company is talking to large
hedge funds. He said AIMPaaS software can be customized to
change the threshold for suspicious activity, which is
determined by changes in order size, trading venues and other
EXAMINERS EYEING INSIDER-TRADING
Like the Palantir platform, the National Exam Analytics Tool
will assist the SEC with tracking potential illegal activities,
such as insider trading, front-running or violations of
"Regulation M, which bans traders from short-selling ahead of an
offering and then buying the same stock in the offering.
SEC Chair Mary Jo White, in a recent speech, said the
insider-trading analysis is done by comparing one database of
information on merger deals and other corporate activities
against trading activity data.
Andrew Bowden, the head of the SEC's Office of Compliance,
Inspections and Examinations, on Saturday called the tool
"revolutionary," saying it gave the SEC an edge over Wall
Street. "They will have to raise the bar in order to keep up
with us," he said.
Kurtas said on Saturday that he has several other projects
in the works.
One prototype would help the SEC detect possible
money-laundering activity, and another is designed to flag
riskier firms so examiners can prioritize their inspections.
Kurtas said his team was also building a high-frequency
trading analytics laboratory. It will collect and sort through
voluminous computer files of transactional trading data,
including order cancellations and other types of message