SEC Gets into the Data Analysis Game

I’m a little late to this news, but it’s worth noting that among the SEC’s initiatives being started in recent months is the Center for Risk and Quantitative Analytics.  Basically, the Center is an attempt to help the Commission get a look around the corner and try to identify risky or abusive behavior in the securities markets before that behavior blows up into a crisis.  This kind of active trap-running is among the hardest tricks in the book for a financial regulator, but the SEC deserves credit for making a real effort to make it work.  What will the CRQA do?  Here’s what the press release said:

The [Center] will support and coordinate the [Enforcement] Division’s risk identification, risk assessment and data analytic activities by identifying risks and threats that could harm investors, and assist staff nationwide in conducting risk-based investigations and developing methods of monitoring for signs of possible wrongdoing. It will work in close association with other Commission offices and divisions, especially the Division of Economic and Risk Analysis, and provide guidance to the Enforcement Division’s leadership on how to allocate resources strategically in light of identified risks.  As a central point of contact for risk-based initiatives nationwide, CRQA will serve as both an analytical hub and source of information about characteristics and patterns indicative of possible fraud or other illegality. Lori Walsh, formerly Deputy Chief of the Office of Market Intelligence, will lead the CRQA.

You don’t know it yet, but that last sentence may be the most important one in the release. Lori is not a lawyer, but has a Ph.D. in financial economics, and sophisticated data analysis is her thing. Many senior members of the Enforcement staff – especially those in the relatively new specialized units – have been waiting and hoping for years that her skills would be focused on just this. As deputy director of the Office of Market Intelligence, though, she just didn’t have the bandwidth to solve everyone else’s complex data analysis problems. My sense is that Lori is finally being turned loose in a way that will be extremely productive for the Enforcement Division and its ability to make complex cases before crises happen.

I think the key here will be how many staff Lori gets for her group. The press release doesn’t say. If she gets some smart quantitative and investigative people working under her, though, there could be some very interesting cases coming down the pike in about three years. It’s a long time to wait, right? Yes, but this is good, unsexy infrastructure investment for the SEC that could pay off for a long time.