Academic Michael Aitken became an entrepreneur almost by chance. After the sale of his first successful venture – a crime-busting technology that is now detecting insider trading and market manipulation on stock markets around the world – he’s moved on to series possibilities. Meet the not-so-quiet research revolutionary who developed a funding model to make it all happen.

Michael Aitken describes himself as an accidental entrepreneur. The founder of SMARTS, a global stock exchange surveillance system, started on his enterprising path with a simple ambition, to acquire research funding for the University of Sydney’s business faculty.

Along the way, he created not only “the 800lb gorilla” in securities markets systems that’s on constant alert for insider trading and market manipulation around the world, he also developed a new way of educating students, which has them making money as they demonstrate the impact of their ideas on the global financial community.

“I was on the professorial path, which traditionally requires you to be published in as many peer-reviewed journals as possible,” explains Aitken, who was very determined to differentiate himself from the pack. “There was only one of me, so I had to find a way to leverage whatever talents I had. I needed a bunch of smart people  – postgraduate students – around me, and to incentivise them to co-write papers with me, among other things.” That was Aitken’s entrepreneurial impetus in the field of financial and accounting research.

Initially, the professor says he was concerned about being considered a fraud for teaching finance without ever having actually invested a dollar himself. So he put theory and textbooks to one side and set about re-educating himself at the coalface. “I asked senior members of the Australian Stock Exchange whether I could hang around the exchange and learn about how stock markets really worked. To my surprise, I was the first academic they really got to know and they were somewhat enamoured of the idea that I was there to learn from them. I was surprised that the textbooks ignored much of the practical aspect of trading and market design.” Subsequently, this knowledge became known as “security market microstructure”, a research discipline Aitken has pioneered in Australia.

His timing for research into financial markets was perfect. In 1987, the Australian Stock Exchange – the forerunner of the Australian Securities Exchange (ASX) – became the first fully automated exchange in the world. It was not long before Aitken observed that a lot of attention was being paid to front office trading activities and less to back office administration. With the right system, patterns of trading might be able to pick up irregularities such as insider trading or market manipulation, he realised. “The best way forward was to get hold of clever people – PhD students – and find a way of funding them [to conduct research]. I wanted to take some of that IQ and replace it with street smarts. There seemed little point in having a bright idea if you have no idea how to sell it.”

Together with students, he created SMARTS, a technology that was able to replay market trading. “I simply observed that if the market was fully automated, it would be possible for yesterday’s markets to be replayed today or at a later time,” says Aitken. By doing that, anomalies in the market can be spotted and potentially investigated. What really inspired him, he reflects, was being told by an operative at the ASX that it would not work. “Tell me it can’t be done and you will have me hooked!” he declares.

When the Australian exchange declined to adopt their system, Aitken used it to teach university students about trading. The father of one of those students put Aitken in touch with fellow technology trailblazers, Paul Phillips and Rob Hodgkinson, who then ran a company called Financial Market Software Consulting (FMSC). The SMARTS surveillance program would complement FMSC’s offering, an automated securities trading system, so the two groups teamed up. Soon after SMARTS had three sales, including the Indonesian Stock Exchange, the Russian Central Bank and the Moscow Interbank Currency Exchange, and Aitken was plunged into a whirlwind of different countries, languages and people.

Over time some 40 national exchanges – including the London Stock Exchange and NYSE Euronext and, eventually, the Australian Securities Exchange – came on board, along with many financial market regulators. In 2009, SMARTS was named the Australian ICT Exporter of the Year and in 2010 Aitken became the Ernst and Young ICT Entrepreneur of the Year. It only took him 15 years “to become an overnight success”, he points out with a larrikin glee.

Aitken’s success hit the headlines in mid-2010, when US-based NASDAQ OMX, the world’s largest exchange company, with operations spanning six continents, acquired SMARTS. Chief information officer Anna Ewing stated at the time: “Efficient surveillance operations are imperative to ensure integrity in today’s markets.” NASDAQ made it clear it was not just buying the technology, but the technical and creative savvy behind the system. “Essentially, they were investing in the people. We had the knowledge and the contacts in surveillance in markets all over the world,” says Aitken with satisfaction.

NASDAQ OMX has kept the SMARTS team of 120 intact on home ground in Sydney. “We repay the Australian government, which has invested in us, by funding jobs here. These jobs (which currently number around 180) pay over AUD$6 million in tax per annum as well as demonstrating Australia as a marketplace that can do a lot more than dig minerals out of the ground,” says Aitken from his Sydney HQ.

The university system has also made a substantial investment in his success, of which Aitken – these days a professor at the Australian School of Business at the University of NSW – is forever mindful. “Universities gave me the opportunity, in some cases without realising it, to explore a new model, one that placed greater emphasis on commercial outcomes than peer-reviewed publications. This kept me interested and made me determined to make a difference,” he says. He built an infrastructure to support research in general. “I wanted others to learn from my experience, without being constrained by it.”

In 1997, he founded SIRCA, a not-for-profit body to host the world’s largest database of historical exchange trading data. Today, it is self-funding with 60 full-time staff, thanks to a deal made with media organisation Reuters. SIRCA built the Reuters Tech Data History Service (now called the Thomson Reuters Tick History). “For the last 10 to 15 years, this has provided intraday trading data for every market in the world,” explains Aitken.

It also achieved his payback goal. Today SIRCA supports nearly all Australasian university-based finance and accounting research that uses stock market data, producing 100 pieces of research a year. But the eternal ideas man was also seeking entrepreneurial ways to up the ante on research funding and started investigating cooperative research centres – “the ultimate research centres for industry clients for which AUD$20 million to AUD$30 million of funding over a seven-year period could be gained from the federal government”, says Aitken, who likes the old adage that “the easiest way to build a small fortune is to start with a large one”.

Back in the 1990s, however, cooperative research centres were the preserve of the physical and engineering sciences and Aitken was initially rebuffed. Then in 2001 the government joined his team of supporters funding the Capital Markets Cooperative Research Centre (CMCRC). It operates as a partnership between universities and industry, commercialises and develops technology for financial markets and provides research and career opportunities for around 60 PhD students. In 2007, indicative of its success, the CMCRC was refunded with twice its initial budget. Today, it is a shining example of the possibilities of cooperation between industry and academia.

Now much of Aitken’s working life is spent on a plane, crisscrossing the globe spruiking new services that the CMCRC and its cohort of PhD students and supervisors are developing. Among these is a new fraud and over-servicing detection system for the health insurance industry (CMC-HIBIS) and a similar system for the general insurance industry (LORICA). Both rely on similar anomaly-spotting principles to the SMARTS technology. A new search engine for text data (Computable News) has also been developed along with a technology for the accounting and audit industry (AcaS) to identify possible fraud in accounting statements and problems with audit processes. There’s also a controversial Market Quality Report, which compares and contrasts securities markets on their efficiency and integrity.

Another service on offer provides independent expert “witness” advice to regulators and others on insider trading and market manipulation cases. Demonstrating the importance of industry-academia collaboration, Ann Leduc, a senior regulator previously with the Canadian Securities Administrators, has been hired to run this part of the business.

At the core of Aitken’s success is an army of PhD students working an atypical model. Rather than sitting at university hoping to see their ideas realised, the students spend six months of every year blending the best of theory with practice. “We have 65 students in the program at exchanges all over the world,” says Aitken, adding that the aim is to have 100 to 150 demonstrating Australian innovation. The students, on AUD$50,000 tax-free scholarships, put their knowledge to work in exchanges in Hong Kong, Singapore, Paris, London, Toronto and further afield, all paid for by the industry partners. Every six months they return to CMCRC to discuss issues they’ve discovered, generate new ideas and solutions. From this process emanated SMARTS Broker, in which the CMCRC joined with SMARTS to build a system for brokers to enhance market integrity.

One of the consequences of this work is that Australia has become the first market in the world to have the same surveillance technology used by the ASX, its corporate regulator, the Australian Securities and Investments Commission, and the majority of Australian brokers. “That sets Australia apart. It’s a practical way that Australia as a regional hub is helping to shape the world, by demonstrating that our marketplaces have greater integrity than anywhere else,” says Aitken emphatically.

As for the venture that started it all, SMARTS is still a key industry partner of the CMCRC. “I still use the fact that we are academics as a major selling point,” says Aitken. “That’s what differentiates us from our competitors. We are at the cutting edge in our fields and hopefully that shows up in our technological innovation.”