Financial Forensics

Gerald Nestler

The term financial forensics has acquired particular currency since the Flash Crash of May 6, 2010, one of the worst market collapses in history. It is exemplified by the research into the crash undertaken by a small financial data analyst, Nanex. In contrast to the official report produced by the US financial authorities, which blamed a human trader, Nanex, by examining the actual trading metadata of the crash, discovered that trades had been executed far below the threshold of conventional one-minute trading intervals. Nanex’s forensic analysis procured evidence of trades that were invisible to the authorities because they lacked the technological resolution apparatuses to examine occurrences taking place on a scale of milliseconds. However, Nanex was only able to challenge the official report after they received the proprietary trading data of the supposed culprit. Within the current legal and regulatory frameworks, financial forensics therefore requires a double figure of the expert witness: the forensic analyst as well as the whistleblower—a renegade figure that in the case of the Flash Crash was an incriminated trader disclosing its proprietary data.

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