Market Intelligence

Market Intelligence

Market Intelligence (often contracted to MARKINT) is a relatively new intelligence discipline that exploits open-source information gathered from global markets. It relies solely on publicly available information such as market prices and ancillary economic and financial data.

In its broadest sense, Market Intelligence refers to the acquisition and aggregation of data from the global markets for purposes of sensemaking. Market Intelligence is not to be confused with Marketing Intelligence, which is concerned with assessing the marketplace for consumer products, nor with Financial Intelligence (FININT), which is primarily concerned with investigations that "follow the money" using information not available to the public.

Market Intelligence is employed by both the financial and intelligence communities, but the term MARKINT is exclusive to the United States Intelligence Community (IC).[1] More specifically, within that community, MARKINT is a form of sensemaking for the purpose of creating Indications and Warning (I&W) of threats to national security. For this community, MARKINT has been defined as,

"the systematic collection and analysis of open-source information from the global capital and commodities markets in order to derive actionable intelligence from the activities of market participants."[2]



Soon after the September 11 attacks, rumors about anomalous market behavior started to abound. Market participants noted what appeared to be transactions consistent with foreknowledge of the attacks on the World Trade Center and the Pentagon in the days just prior to September 11, 2001.[3] Specifically, traders observed a surge in the volume of put options in the parent companies of United Airlines (on September 6) and American Airlines (on September 10). There were a number of studies of market behavior surrounding these events, including a study of the relative volume of puts and calls.[4]

The possibility of terrorist-related insider trading was sufficiently credible that the authors of the 9/11 Commission Report[5] addressed the issue, noting that, "There have also been claims that al-Qaeda financed itself through manipulation of the stock market based on its advance knowledge of the 9/11 attacks." The Commission concluded that, "Exhaustive investigations by the Securities and Exchange Commission, FBI, and other agencies have uncovered no evidence that anyone with advance knowledge of the attacks profited through securities transactions." Investigators determined that a large institution with no ties to al-Qaeda purchased 95% of the buyer puts on UAL.

Nevertheless, whether or not al-Qaeda or its confidents had attempted to profit from its foreknowledge of the attacks, the possibility of inferring actionable intelligence from anomalous changes in price intrigued many within both the financial and intelligence communities..


The principles that serve as the basis for MARKINT emerged in several papers written shortly after 9/11. One of these—"Notes on the Prospective Formation of a Market Intelligence Consortium" (September 27, 2001) by Christina I. Ray—was prompted by the discussions of anomalous market activity shortly before 9/11. This paper proposed a private consortium that might provide to federal authorities a central market-intelligence capability designed to "(1) serve as an early warning system against physical and economic warfare by terrorists and their sources of funding, and (2) serve as a method of identifying those sources of funding." The paper suggested that the basic methodology for identifying market behavior consistent with foreknowledge of upcoming terrorist activity might be to:

  • define and classify the potential sensitivity of each security or instrument to various types of stress (e.g., loss of property, massive reduction in airline revenue);
  • consolidate it in a confidential data warehouse; and
  • mine that data for abnormal patterns of behavior.

An expanded discussion was included in a follow-on paper, "Developing Counter-Terrorist Intelligence from Securities Transaction Data" (December 19, 2001), by Christina I. Ray and William J. Hery. This paper laid out potential financial activities by terrorists or their confidants, the anticipated effects on the global markets, and the utility of including market-intelligence principles in a fused approach informed by multiple sources (i.e., "all-source" intelligence). As Ray and Hery stated:

1. Terrorist attacks in the U.S. can have significant impact on specific segments of the financial markets.
2. Terrorist organizations may use their advance knowledge of such attacks for financial gain. The organization may directly finance future operations by executing transactions that profit from attacks on:
  • "icon" targets (e.g., the White House or the World Trade Center); and
  • "non-icon" targets, merely because they maximize the opportunity for trading profit (e.g., an attack on the Chicago Board of Trade, where positions are highly leveraged).
3. The confidants of terrorist organizations may also use their advance knowledge of attacks or financial transactions for personal gain. That is, they may engage in "insider trading" of another sort: one that violates the security of the terrorist organization.
4. Terrorists must take significant financial positions prior to the attack to capitalize on the attack.
5. Such positions will likely consist of positions in sophisticated derivative products and strategies for maximum leverage and gain.
6. Such positions may be the aggregate of multiple smaller positions distributed over several financial institutions in an attempt to escape detection.
7. Discovery of such complex financial positions could provide valuable information which, combined with other intelligence, may provide warning of impending terrorist attacks, the type or even identity of the targets, and the timing of the attacks.

Meanwhile, Randolph M. Tauss, a senior government program manager who in mid-September 2001 had independently envisioned market-intelligence principles similar to those expounded by Ray and Hery, wrote an internal memorandum and drafted a paper recommending that the potential utility of these concepts be evaluated. He subsequently became the originator and Director of the MARKINT ("Market Intelligence") Project, a post-9/11 effort comprising more than 170 participants, which assessed the feasibility of deriving actionable intelligence from capital and commodities market data.[6] Tauss published a seminal paper on the topic which, along with numerous others that followed, was made available to the United States Intelligence Community via Intellipedia. The most comprehensive of these was a monograph primarily authored by Ray that described in detail the findings of the MARKINT Project and analyzed the efficacy of using data from financial markets to presage large-scale terrorist attacks. Major contributors to that monograph included Tauss and James Rickards, both of whom (along with Ray) subsequently wrote additional papers on the topic that are now in Intellipedia.

Although the original focus of MARKINT was counterterrorism, it has since expanded to include other applications within the Intelligence Community, such as geopolitical analysis, counterintelligence, and cybersecurity.

Theoretical Foundations

Market Intelligence has its roots in classic and modern economic theory. The efficient-market hypothesis (EMH) in economics posits that markets are "informationally efficient": that is, that market prices instantaneously reflect all information known to participants at any point in time. In the "strong" form of EMH, such information includes insider or other hidden information known to only a few market participants. Essentially, the price of each security reflects the consensus knowledge and opinion of all market participants.[7]

Behavioral economists dispute EMH in its purest form, attributing inefficiencies in market behavior to the flaws in the reasoning and sensemaking abilities of the human decision-makers who comprise the markets. They posit that humans may have rational or irrational biases that are reflected in market prices. For example, they may be subject to certain irrational cognitive biases, and attribute the imperfections in financial markets to characteristics such as overconfidence, overreaction, representative bias, information bias, and various other predictable human errors in reasoning and information processing. Some note that market participants may also have rational biases, such as risk aversion in the face of uncertainty.[8]

MARKINT & Prediction Markets

MARKINT is philosophically consistent with the theory underlying prediction markets, in which speculative markets are created for the purpose of making predictions. The probability of the event or the expected value of the parameter can be inferred from aggregate knowledge as reflected in current market prices.

However, rather than being explicit prediction markets—such as futures traded on the Iowa Electronic Markets (IEM)—global financial markets are implicit prediction markets. Consistent with EMH and behavioral economics, the global capital and commodities markets might be considered to be forward-looking intelligence aggregators, reacting in real-time to new information (either public or confidential) and expert analysis. They are therefore not unlike prediction markets which seek to obtain answers to important questions—although, in the capital markets, answers must be inferred rather than directly observed. This inference process is an exercise in sensemaking, in which the fusion of information from diverse disciplines can enhance the process of transforming data to information and information to knowledge.

One key difference between bona fide prediction markets and the global capital markets is the nature of the participants. In the capital markets, well-capitalized institutional investors with access to superior information and research—and therefore more confidence in their predictions—are more likely to execute larger transactions and have greater effect on market prices. Thus, expectations inferred from the capital markets are more likely to reflect expert opinion.

There have been efforts in the past by the Intelligence Community to provide actionable intelligence via the use of specialized prediction markets. For example, the Defense Advanced Research Projects Agency (DARPA) initiated FutureMAP (Futures Markets Applied to Prediction), in which it intended to create a public futures market designed to take advantage of the "wisdom of crowds" in avoiding surprise and predicting future events. DARPA aimed to create a mechanism whereby individuals could trade on questions of interest to the intelligence community. But the program was canceled on 29 July 2003 in the face of political pressure.[9]

Analytic Methods for MARKINT

Analytic methods used to infer Market Intelligence may be theory-based or data-based. In a theory-based approach, analysts identify broad or narrow questions of interest. For broad questions, analysts might use new evidence garnered from the markets to test conclusions previously arrived at through traditional intelligence sources and methods. For narrow questions, analysts might investigate specific questions about the intentions of a defined actor.

Conversely, in a data-based approach, markets might be monitored for anomalous activities, from which a theory of a hidden driver might be constructed. For example, in the case of an upcoming but unseen event such as a terrorist attack, patterns in market prices might allow an analyst to infer the existence of hidden knowledge (as in EMH) and/or an increased level of risk aversion (as in behavioral economics).

Certain types of markets and securities provide particularly rich sources of data. For example, an increase in a listed stock option’s implied volatility indicates a wider range of possible market movements in the price of the underlying stock. Similarly, a shift in asset allocation (e.g., out of stocks and into Treasury bonds or gold) might indicate a so-called "flight to quality," in which investors prefer to exchange profit potential for safety in a high-risk environment.

A few of the statistical methods used to analyze the effect on markets of terrorist attacks include non-parametric approaches, filtered GARCH-EVT methods, and event study approaches.[10] There have been a number of academic studies relating to terrorist attacks, including those on markets in general,[11] as well as event studies related to Israel[12] and the Basque region of Spain.[13]

MARKINT in the Financial Community

In the financial community, Market Intelligence is often utilized to monitor market activity, to better estimate portfolio risk, or to obtain a trading advantage. It might include qualitative information about markets (e.g., large investors’ current market activities), or quantitative information gleaned from market prices (e.g., patterns in the price behavior of a given stock).

For example, the Stock Watch unit of the NYSE’s Market Surveillance division uses sophisticated computer technology to look for patterns of price movement consistent with market manipulation or insider trading.[14] A risk manager might use the average bid-offer spread of a security in the marketplace to estimate liquidity risk.[15] Or, a hedge fund manager might mine historical data for repetitive patterns that can be automated using statistical arbitrage methodologies for purposes of algorithmic trading (and its variant, high-frequency trading).[16] Other asset managers who follow a quantitative trading strategy might employ an alpha generation platform that endeavors to identify anomalous price patterns consistent with insider trading, and creates rules-based trading strategies that piggy-back on such activity. (If the fund manager is not privy to the "material nonpublic information" itself, such activity does not rise to the level of insider trading as defined by the SEC and is therefore not illegal.)[17]

Market Intelligence is also used to monitor the stability of the financial system. For example, the Federal Reserve’s Markets Group contains a Market Operations, Monitoring and Analysis (MOMA) area, which is the System’s "nerve center for financial market intelligence gathering and dissemination."[18] Similarly, NASDAQ’s Market Intelligence Desk is tasked with aggregating live market information in order to assess the state of the markets and of individual stocks.[19]

MARKINT in the Intelligence Community

MARKINT is especially useful to the intelligence community because state and non-state actors and their confidants may seek to profit from their foreknowledge of important events by taking speculative positions in global markets.

MARKINT is itself a form of OSINT (open-source intelligence) that is produced from publicly available information that is collected, exploited, and disseminated in a timely manner to an appropriate audience for the purpose of addressing a specific intelligence requirement.[20]

It involves the utilization of only publicly observable information, such as market prices and ancillary financial data, rather than confidential information about market participants or their activities. Operationally, MARKINT may be considered similar to SIGINT, in that it can use automated anomaly detection methodologies (for example, those of pattern recognition) to detect market activity consistent with foreknowledge of an impactful event.

The particular utility of MARKINT to the intelligence community is its orthogonality to other sources of intelligence, such as HUMINT or IMINT. Intelligence analysts prize the availability of information from multiple, independent sources of intelligence (i.e., all-source intelligence).

MARKINT & Unrestricted Warfare

MARKINT’s focus on the global markets makes it particularly useful in generating Indications and Warning (I&W) of economic or financial attacks by state and non-state actors.

Even unsophisticated attacks by non-state actors can have profound effects on world economies. A working paper from the International Monetary Fund (IMF) describes the impact on global markets of the attacks of 9/11, as well as the 2004 Madrid train bombings.[21] Economic effects are in fact the intent of certain types of attacks. For example, it was revealed that "Material seized when Osama bin Laden was killed show that al-Qaeda considered attacking tanker ships and other marine infrastructure last summer in an effort to force up the price of oil and damage the U.S. economy, according to U.S. officials. . . . Another U.S. official said the intelligence added details to previously known information on al-Qaeda's interest in targeting the oil and natural gas industry."[22]

And sophisticated attacks by state actors might have even greater effect. In a 1999 book titled "Unrestricted Warfare" (translated from the Chinese), the two authors—both colonels in the Chinese People’s Liberation Army—described financial warfare as the future of modern warfare:

"So, which [of many unconventional means], which seem totally unrelated to war, will ultimately become the favored minions of this new type of war – "the non-military war operation" – which is being waged with greater and greater frequency throughout the world? …Financial War is a form of non-military warfare which is just as terribly destructive as a bloody war, but in which no blood is actually shed. Financial warfare has now officially come to war’s center stage."[23]

See also


  1. ^ Ray, Christina (2010). Extreme Risk Management. United States: McGraw Hill. pp. 230-244. ISBN 978-0-07-170059-7. 
  2. ^ Ray, Christina (2010). Extreme Risk Management. United States: McGraw Hill. pp. 231. ISBN 978-0-07-170059-7. 
  3. ^ Carpenter, Dave (18 September 2001). "Exchange examines odd jump". The Associated Press. Retrieved 27 July 2011. 
  4. ^ Poteshman, Allen M. (2002). Unusual Options Market Activity with an Application to the Terrorist Attacks of September 11, 2001. University of Illinois at Urbana-Champaign, Department of Finance. SSRN 370741. 
  5. ^ The 9/11 Commission Report. The National Commission on Terrorist Attacks Upon the United States. pp. 499. 
  6. ^ Ray, Christina (2010). Extreme Risk Management. United States: McGraw Hill. pp. vii (Preface). ISBN 978-0-07-170059-7. 
  7. ^ Fama, Eugene (May 1970). "Efficient Capital Markets: A Review of Theory and Empirical Work". Journal of Finance 25 (2): 383–417. doi:10.2307/2325486. JSTOR 2325486. 
  8. ^ Rubenstein, Mark (May–June 2001). "Rational Markets: Yes or No? The Affirmative Case". Financial Analysts Journal 57 (2): 15–29. JSTOR 4480313. 
  9. ^ "DARPA - FutureMAP Program - Policy Analysis Market (PAM) Cancelled". 
  10. ^ Chesney, Marc; G. Reshetar, M. Karaman (February 2011). "The Impact of Terrorism on Financial Markets: An Empirical Study". Journal of Banking and Finance: 253–267. 
  11. ^ Chen, Andrew H.; T.F. Siems (June 2004). "The effects of terrorism on global capital markets". European Journal of Political Economy 20 (2): 349–366. doi:10.1016/S0176-2680(03)00102-2. 
  12. ^ Eldor, Rafael; R. Melnick (April 2004). "Financial Markets and Terrorism". European Journal of Political Economy 20: 367–386. doi:10.1016/j.ejpoleco.2004.03.002. Retrieved 27 July 2011. 
  13. ^ Abadie, Alberto; J. Gardeazabal (2003 March). "The Economic Costs of Conflict: A Case Study of the Basque Country". American Economic Review 93 (1): 113–132. doi:10.1257/000282803321455188. Retrieved 27 July 2011. 
  14. ^ "Overview: U.S. Equities". NYSE Regulation. Retrieved 27 July 2011. 
  15. ^ "Pricing a Global Measure of Liquidity Risk: Investors should not overlook the impact of liquidity on the prices of assets". Northwestern University, Kellogg School of Management. Retrieved 27 July 2011. 
  16. ^ Lo, Andrew W. (2010). Hedge Funds: An Analytic Perspective (Revised and expanded ed.). Princeton, NJ: Princeton University Press. pp. 260. ISBN 9780691132945. 
  17. ^ "Insider Trading". U.S. Securities and Exchange Commission. Retrieved 27 July 2011. 
  18. ^ "About the Fed". Federal Reserve Board of New York. Retrieved 27 July 2011. 
  19. ^ "The Market Intelligence Desk: Your Link to the Street". NASDAQ. Retrieved 27 July 2011. 
  20. ^ The Open Source Center, for example, provides the Intelligence Community with information on foreign political, military, economic, and technical issues.
  21. ^ Johnston, R. Barry; O.M. Nedelescu (2005). IMF Working Paper: The Impact of Terrorism on Financial Markets. International Monetary Fund. ISBN 1934-7073. 
  22. ^ Dilanian, Ken (21 May 2011). "Al Qaeda wanted to attack tankers, Bin Laden files show". Los Angeles Times. Retrieved 27 July 2011. 
  23. ^ Liang, Qiao; W. Xiangsui (2002). Unrestricted Warfare: China's Master Plan to Destroy America. Panama City, Panama: Pan American Publishing Company. ISBN 0-9716807-2-8. 

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