Professor Mike Aitken is an academic who took out a coveted entrepreneur of the year award last year, and that’s despite for years having to cope with numerous detractors. All of this did not stop him creating a $28 million company whose technology was sold to the Nasdaq stock market in New York.
He explains his onetime critics and eventual hometown recognition in terms of his similarities to Kylie Minogue.
“No one wanted to admit that fraud was an issue and in Australia no one believes that homegrown can be any good,” says Aitken. “I call it the ‘Kylie’ factor – you have to be a big star overseas before you can be a big star here.
“Australia was our 10th client, while the Russian Central Bank and the Moscow Interbank Currency Exchange were our first and second.”
The SMARTS group pioneered a technology called Securities Markets Automated Research, Trading and Surveillance and is a real time surveillance of securities markets focusing on identifying key prohibited trading behaviours such as insider trading, market manipulation and broker-client conflict, for example, front-running.
Despite our slowness to embrace the technology of the SMARTS group, Australia was the first country to automate its trading systems and that gave inspiration to Aitken and his team.
"We suggested they save the data of a day's trades and replay it the next day," he recalls.
It was the start of a surveillance system that now is used worldwide, where algorithms scan looking for patterns of trading – unusual volumes or price movements – that suggest some strange market movements are afoot.
“The business was built from scratch and now has 25 per cent of the world market,” Aitken explains. “This means it’s in 40+ national exchanges and regulators and 150 brokers across 40 countries.”
He says the next best rival has about four to five customers and it’s not a bad effort for a company started around 1995. It now has 125 employees across offices in Sydney (110), London (10), New York (3), Amsterdam (one), Toronto (one) and Japan (one).
Developing the product
The first commercial product was the SMARTS Integrity Platform, which was a market surveillance solution for exchanges and regulators. It works by taking real-time data feeds directly from the trading engine of an exchange. These are processed in real time and it means there can be automatic detection of dodgy trading activities.
And it’s particularly impressive when you consider Mike Aitken is an academic from the University of New South Wales, which now has the Australian School of Business (ASB).
To put the story into context, the SMARTS group is a company founded by Aitken at the ASB, which came out of the Capital Markets Cooperative Research Centre (CMCRC), also at the ASB. CMCRC is a clever strategy that has brought together the disciplines of finance, accounting, securities law, and computer science in the area of fraud detection.
In 2004, SMARTS established Capital Markets Surveillance Services (CMSS) as a joint venture with the CMCRC, to provide real time compliance systems to broking firms. Then CMSS merged with the SMARTS Group and all the products and services took on the SMARTS brand with the broking product being relaunched as SMARTS.broker.
In a nutshell, the software can find evidence of insider trading, market manipulation and continuous disclosure breaches. Professor Aitken explains, “It looks for advanced knowledge of a company announcement, by detecting unusual price or volume movements, prior to information being published. This IT system can provide prima facie evidence of insider trading, because if no information has been published, price rises may be a case of market manipulation.”
One could argue he defies the George Bernard Shaw criticism of educators that “those who can do, those who can’t teach.”
The SMARTS group has been recognised as one of Australia’s leading exporters, as the winner in the Information and Communications Technology category of the Australian Export Awards.
An entrepreneurial academic
So, what explains Aitken’s entrepreneurial ways?
“I was an academic who felt that market impact had to stand for more than how many trees I could chop down for articles in peer reviewed academic journals,” he admits.
For those doubters of academia, Aitken has news for them in explaining his success. And in a sense he made his company stand out from the crowd by remaining in and leveraging off the university community. It gave him access to a supply of highly skilled and well-trained financial technology professionals.
“My underlying funding base at the University enabled me to significantly curtail risk of failing to succeed and my access to human capital from the same place was critical,” he explains. “I brought in two people who were brilliant technologists to turn my half baked ideas into gems and then a serious business manager who knew the difference between a good and a great idea was implementation.”
For his efforts Aitken has picked up a number of impressive awards including the Ernst & Young’s Australian Entrepreneur of the Year award in the technology section. He also won the award in the Information and Communications Technology (ICT) category of the Australian Export Awards and was named the NSW Overall Exporter of the year Award.
“This award is a culmination of two decades of effort aimed at demonstrating that academics from the business disciplines can have a real impact on their professional community,” he told the audience at the Ernst & Young awards.
Asked what were the milestones that explain the progress of the company, Aitken gave many a budding entrepreneur what is the DNA of great businesses.
“Identifying the first three first-class employees and then identifying partners who could help with overseas sales,” he points out. “Next, the first overseas installations, followed by securing first tier one clients – the London Stock Exchange and NYSE Euronext and finally the sale to Nasdaq OMX.”
Aitken says a sale to such an icon of the international stock broking community provides clear recognition of the leadership role that Australia plays in the design and deployment of front-line technology for securities markets.
“Beyond providing a world class securities market, NASDAQ provides technology to 70 of the world’s securities markets and a decision to buy SMARTS is proof of the leadership role that SMARTS has in its marketplace,” he says proudly.
The decision to stay private
Given the success, the question had to be raised why the SMARTS Group has not become a public company?
“We have sold to the Nasdaq and will be using the cash to develop similar technologies in related industries —health insurance and general insurance,” Aitken explains.
Aitken is keeping tightlipped on what the sale was worth, but Capital Markets CRC, which held 12 per cent of SMARTS, says the sale will generate "very significant new funds". SMARTS is now wholly owned by NASDAQ OMX.
Professor Aitken, who is also the CRC's chief scientist, says the universities that own the centre are delighted because "we spend our money on PhD students in information technology and finance".
In many ways his answer underlines the key reason why a company goes public, that is, it needs capital but the way this business has been conceived and grown, it has been able to avoid the challenge of being under the glare of the analysts that track public companies.
That said, the experience of building the SMARTS Group has left a bad taste in Aitken’s mouth of having to deal with venture capitalists.
A business education
Being an academic who mastered the art or possibly the science of business, he was asked what he has learnt about business over the time he spent building the operation?
“It’s easy if it’s your passion,” he counsels. “But it’s impossible otherwise.”
And what did he learn about himself as he dealt with getting outside his natural comfort zone of academia into the world of hi-tech business?
“About myself I have learned that I need more balance in my life, which is actually a major task for an entrepreneur,” Aitken reveals. “ But along the way, I have become more skilled at evaluating ideas.”
On the subject of the company now that it has been sold to the Nasdaq?
“In the hands of the Nasdaq it will double in size in half the time that we could have done this,” he says. “This will make life impossible for its competitors.”
So what is the future of the company and the work of the group? That’s simple, the search is on for other industries where rorting is rife.
The methodologies developed for market players behaving badly can be applied to fraud in the health system. International figures say four to eight per cent of claims are dodgy and that means the Australian taxpayer could be saved around $8 billion a year.
The technology is all about looking for patterns and it has an unbelievable potential in so many industries. It will be a new tailor-made technology, but using the experience and ideas learned from creating SMARTS.
"Automated systems can't do all things but we can help the brain by creating graphs, charts or whatever, by building pictures," Aitken told The Australian last year.
George Bernard Shaw, when it comes to Mike Aitken, you are a long way off the mark.
From Professor Aitken
First business: SIRCA – a not-for-profit company that provides essential data and computing infrastructure to support academic research (in Accounting and Finance) across most Australian and New Zealand universities. The technology that we created to facilitate the research process is now a commercialised product known as the Reuters Tick Data History Service.
Career highlight: Selling SMARTS (an Australian built) technology to Nasdaq – the number one provider of exchange technology in the world.
Best piece of business advice you got: Invest in your own ideas.
The worst: Trust venture capitalists to improve your management bandwidth.
Most frustrating part of doing business: Dealing with the IT – innovation termination. They are supposed to support a business but in many ways hold it hostage.
Favourite marketing technique: A beer and a snag with your customers to build a relationship well beyond the technology.