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Dimensionality reduction techniques to support insider trading detection

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  • Adele Ravagnani
  • Fabrizio Lillo
  • Paola Deriu
  • Piero Mazzarisi
  • Francesca Medda
  • Antonio Russo

Abstract

Identification of market abuse is an extremely complicated activity that requires the analysis of large and complex datasets. We propose an unsupervised machine learning method for contextual anomaly detection, which allows to support market surveillance aimed at identifying potential insider trading activities. This method lies in the reconstruction-based paradigm and employs principal component analysis and autoencoders as dimensionality reduction techniques. The only input of this method is the trading position of each investor active on the asset for which we have a price sensitive event (PSE). After determining reconstruction errors related to the trading profiles, several conditions are imposed in order to identify investors whose behavior could be suspicious of insider trading related to the PSE. As a case study, we apply our method to investor resolved data of Italian stocks around takeover bids.

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  • Adele Ravagnani & Fabrizio Lillo & Paola Deriu & Piero Mazzarisi & Francesca Medda & Antonio Russo, 2024. "Dimensionality reduction techniques to support insider trading detection," Papers 2403.00707, arXiv.org, revised May 2024.
    • Handle: RePEc:arx:papers:2403.00707
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    3. Michele Tumminello & Salvatore Miccichè & Fabrizio Lillo & Jyrki Piilo & Rosario N Mantegna, 2011. "Statistically Validated Networks in Bipartite Complex Systems," PLOS ONE, Public Library of Science, vol. 6(3), pages 1-11, March.
    4. Li, Baibing & Martin, Elaine B. & Morris, A. Julian, 2002. "On principal component analysis in L1," Computational Statistics & Data Analysis, Elsevier, vol. 40(3), pages 471-474, September.
    5. Carl Eckart & Gale Young, 1936. "The approximation of one matrix by another of lower rank," Psychometrika, Springer;The Psychometric Society, vol. 1(3), pages 211-218, September.
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