Battelle has licensed its Anomalator software—which pinpoints anomalous information in financial data to identify problematic trends that can put the global financial system at risk—to V-INDICATOR ANALYTICS of Spokane, Wash. Image: Frank Gruber. |
Identifying atypical information in financial data early
could help identify problematic financial trends such as the systemic risk that
recently put the U.S.
and global financial systems in a downward fall. Recognizing such anomalous
information can also help regulators, investors and advisors better manage
their investment and savings portfolios.
Now, new analytical software developed by Battelle
researchers based in Richland
at the Department of Energy’s Pacific Northwest National Laboratory can do just
that. The technology has been licensed by Battelle to financial services
company V-INDICATOR ANALYTICS LLC, of Spokane,
Wash.
In a demonstration of this technology, the
Battelle-developed Anomalator software recently picked out the atypically
stable and positive returns reported by disgraced financier Bernard Madoff as
an anomaly among hundreds of funds. He is now serving a 150-year prison
sentence for scamming investors out of as much as $65 billion in a Ponzi scheme
that spanned at least 20 years. Unfortunately, Madoff’s fraud was concealed for
more than 15 years. The use of this sophisticated anomaly-detection and
visualization tool could have exposed Madoff early on, and can help expose
future scandals, its inventors say.
“The Great Recession of the late 2000s has shown how
questionable financial practices can place America’s economy at serious
risk,” says John McEntire, the Battelle commercialization manager who
licensed the technology to V-INDICATOR. “The Anomalator provides the
unbiased, fact-based analysis needed to identify those problematic practices
and help protect the nation’s economy.”
Traditional financial analysis reports either provide a
list of numbers or a simple line graph to represent the value of just one
investment over time. The Anomalator is unique in its ability to identify
unusual trends in complex financial data and graphically show how it compares
with larger datasets.
Analysis of fund data done with the Anomalator software illustrates how disgraced financier Bernard Madoff’s returns (solid red line) were an anomaly, as they were atypically stable while other funds repeatedly spiked up and down. Anomalator’s inventors say their sophisticated anomaly-detection and visualization tool could have exposed Madoff and can help expose future scandals. Source: Pacific Northwest National Laboratory |
Anomalator uses mathematical algorithms to identify the
atypical data in databases that record the movement of funds or the people who
manage them over time. The software then creates a line graph representing the
progress of anomalous funds or managers, as well as other user-selected funds
or managers of interest.
Visual data analysis for the financial field
V-INDICATOR President Burton “Bud” Sheppard learned that Battelle and
PNNL had a long history of visually analyzing data for homeland security
applications. Researchers and commercialization managers from Battelle agreed
to help him develop new visual analytics software. Battelle put up its own,
private technology maturation funds to finance the development and then granted
a license to V-INDICATOR to market the software for use in the financial
services industry.
Homing in on the tool’s potential to detect financial
fraud, V-INDICATOR compiled Madoff’s stated returns from one of the leading
Madoff feeder funds. Battelle and V-INDICATOR researchers ran several scenarios
and found that while the majority of the market was volatile, repeatedly
spiking up or down, Madoff’s returns were atypically upward sloping and
effectively never lost money. This technology’s unique anomaly-detection and
visualization helps expose glaringly anomalous patterns such as those produced
by Madoff.
“There’s virtually nobody who duplicates Madoff’s
straight line and that could or should have been a dead giveaway to anybody who
was looking at the data,” says Sheppard. “Unfortunately, this anomaly
wasn’t caught until billions of dollars had already been lost. But financial
firms and overseers can detect such crimes now with the help of the Anomalator.”
V-INDICATOR is currently working with financial industry
leaders to apply Anomalator software to critical problems addressed by the
Dodd-Frank legislation and its regulations. Applications span systemic risk to
funds, derivatives, stocks, bonds, and other financial instruments—and uses
including regulatory, wealth management, fiduciary, forensic, advisory, and
asset management and monitoring.