A Fintech Opportunity in National Security

In July, 2003, the Pentagon's Defense Advanced Research Projects Agency (DARPA) scuttled an ill-conceived terrorism futures market. While the project was a political failure, the idea underscores the ongoing need for innovative thought in the area of indications & warning (I&W). The construction of a terror futures exchange wherein market participants bet on events themselves is perhaps politically unpalatable, if not in poor taste, but conceptually the idea is grounded in rational thought. But rather than create an artificial market where explicit outcomes are at stake, a better analytic approach for purposes of intelligence analysis might be to translate existing financial and commodity data into finished intelligence.

Markets behave in a generally rational manner, particularly when factoring in the economic and financial implications of geopolitical uncertainty, and valuations represent a proxy for the beliefs of market participants. Financial markets are a form of communication, with the myriad data, transactions, and instruments comprising a distinct language. The challenge is to understand and interpret this language in the context of global security, and to divine the trends within markets which might suggest an impending terrorist attack or geopolitical crisis.

A financial I&W system would involve a comprehensive monitoring of global financial markets to uncover anomalous trading behavior in various asset classes. The difficulty here, of course, is establishing a general model of price/volume behavior based upon historical data which would enable analysts to discern anomalies from the general noise. Given the difficulty of this and the inherent imperfections in forecasting security prices, such a system would be valuable not as a sole-source of I&W, but as a piece of the larger I&W infrastructure which draws upon a variety of disparate sources and types of data. Financial I&W would serve well to clarify existing intelligence, or perhaps, as was likely the case prior to September 11, send up a red flag and initiate coverage.

Financial markets can provide intelligence analysts with valuable insights. Data could be useful in determining whether a bias exists toward the potential for a major geopolitical event, or whether there is deliberate activity within financial markets indicating trading designed to profit from a future event, suggesting foreknowledge. How do we effectively parse market behavior in an effort to understand how valuations might reflect the risk of an impending terrorist attack? Unfortunately, markets often overshoot the target, sometimes quite dramatically. However, for purposes of terrorism I&W it would not be necessary to accurately predict the correct valuation for a given asset or asset class, only to divine the trend and the underlying reason for the trend, to strip away the drivers underpinning the movement.

It is generally accepted that prices reflect all information that is known or knowable. By the same token, then, it should be possible to discern the information which is factored into prices and, by process of elimination, identify those factors as they relate to potential geopolitical events.