Social Strategy 140: Direct Action #Risk...

Twitter real-time direct action (DA) "Information Warfare" between nation states is a daily task. Current and future Operational Risk Management (ORM) priorities will encompass the imperative to staff "Corporate Intelligence Unit" Fusion Centers.

A prudent Operational Risk strategy, shall include a "Big Data" capability combined with deep social intelligence analysis. Here is a historical FLASHBACK in time, to one example of why leadership is devoting new resources and investment to these internal risk management capabilities:

New Diplomatic Avenue Emerges, in 140-Character Bursts
By SOMINI SENGUPTA October 3, 2013

UNITED NATIONS — "Countries all over the world, dictatorships and democracies alike, have in the last few years sought to tame — or plug entirely — that real-time fire hose of public opinion known as Twitter. 

But on the sidelines of the General Assembly meeting over the last couple of weeks, ministers, ambassadors and heads of state of all sorts, including those who have tussled with Twitter the company, seized on Twitter the social network to spin and spread their message. 

At the height of the diplomatic negotiations last week over a United Nations Security Council resolution that would require Syria to turn over its stockpile of chemical weapons, the American ambassador to the United Nations, Samantha Power, used Twitter to preempt criticism of the measure as lacking teeth because it had no automatic enforcement provision."

What does this mean for the global enterprise, who circumnavigates the planet to initiate and manage daily business operations?  It means that "Information Warfare" and intelligence collection and analysis for the enterprise continues, as a top strategic and operational function.  It requires continuous Operational Risk strategy oversight.

How an organization directs personnel and manages daily decisions, is more mobile information-centric than ever before.  Just stand at any major sidewalk intersection in a major city across the world and count the number of people looking at their "Smart Phones" as they cross the street.

The speed of business that is fueled by leaders commenting via social media, can even influence commodity traders in futures markets and operational planners in the "E-ring."

Leadership has the ability to by-pass the traditional media juggernauts to get their message heard in seconds.   The President of a major stock exchange or of a G20,  has a "Duty of Care" to it's constituents to make the correct public decisions.  At the same time, a moral and ethical context begins to evolve, in the vast battle space of 140 digital characters.

The use of a social media post or Tweet from the Board Room to the Court Room; from San Francisco to Tehran, or from Wall Street to Hong Kong, is a risk-oriented asymmetric information tactic delivered in plain sight.

Those social tactics, visual in the landscape of our modern day quest for influence, notoriety or outcry, shall forever shape the breadth of our enterprise digital risk management spectrum...

Beware of the Cowboy: Risk Driven by Fear...

Beware of the cowboy.  Operational Risk Management (ORM) spans the hazards on the flight deck on the USS Ronald Reagan (CVN 76) or behind enemy lines or even to employee behavior on the front lines of the private sector on Wall Street:

"The recent conviction of Michael Coscia in the Federal District Court in Chicago in the first prosecution for “spoofing” provides more clarity to high-frequency trading firms about how they can operate. The message is to tread carefully when a strategy depends on using orders that will be quickly canceled because the government may claim they are an effort to manipulate the market by fooling others into trading.

Spoofing was made illegal in the Dodd-Frank Act, which prohibits “bidding or offering with the intent to cancel the bid or offer before execution.”

Believe it when we say that people who try to be cowboys in your organization are operating without regard to risk. Now multiply the number of cowboys by the number of people that they surround on their team, who think that this is the way to operate. It doesn't take long to find out that these are the root causes of many of the operational risks in your organization. And it starts out with the basics even in the vast private sector beyond Wall Street:

• Revenue is not booked according to the rules. Products sit in the warehouse yet revenue ends up on the sales reps commission report because (s)he had a signed order.
• Assets are not valued correctly. Bank accounts are not validated to make sure they actually exist and accounts receivables are inflated.

These are just two of the many facets of occupational fraud that starts with a few cowboys who have little regard for managing risk and all the incentives to line their pockets with new found cash or bonuses.

From Leadership Lessons of the Navy SEALS

The Cowboy

"Neither of us knows if such a thing has ever been tolerated in modern commando teams. Yes, sometimes you need to charge forward. But, there are simply too many potential casualties and too much political currency resting on commando missions to entrust one to a cowboy. Authorization for an operation depends on the accurate calculation of operational risk. This requires an assessment of proven forces ability to perform a task. All this is contrary to the cowboy philosophy of depending on experimentation, pluck, and luck in order to succeed."

"The problem with being a cowboy is that your bosses won't employ you if they can't trust you, and they can't trust you if they don't know what you'll do. And then you're stuck with the reputation."
        --LT. CMDR. Jon Cannon

You might think that the reason is ego or just plain greed. However, the real motive may not be so clear. More than likely, the motive is fear. And that fear is something that grows until it gets to the point of creating harm, loss and destruction. You have to find the cowboys in your organization and you have to follow the mantra of quality gurus from years past, "Drive out Fear".

Algo Bots: The Risk of Human Error...

What "Trust Decisions" did you make this past week?  How fast did you make them?  The ability to manage an entire portfolio of operational risks in a daily routine is daunting.  How do you prioritize? What Operational Risk Management (ORM) process will you engage in, with so many uncertain outcomes?  Why will you sit up in bed at 3AM, to read the latest alert on your smartphone?

In October of 2012, this ORM blog discussed the topic of "Algo Bots" and "Dark Pools".  Machine language talking to other machines, to make optical network speed decisions and more precise, "Trust Decisions."  What is the risk of a low probability and high consequence incident when humans are taken out of the equation?  Dave Michaels of Bloomberg explains the current focus:

Mary Jo White’s blueprint for imposing tighter controls on high-frequency traders and some of the murky venues they inhabit stops short of a crackdown. 

The U.S. Securities & Exchange Commission’s plan, unveiled by White in a speech this week, advanced some new ideas while borrowing heavily from existing proposals and measures that already have support on Wall Street. While stock exchanges, rapid-fire traders and private trading venues known as dark pools all would come under new scrutiny, White didn’t embrace the kind of tighter restraints that have been enacted in countries such as Australia and Canada. 

White isn’t acting in a vacuum. She is responding to political pressures raised by an investigation by the New York attorney general into whether speed traders prey on slower-moving investors as well as a book by Michael Lewis, “Flash Boys,” that condemned the role of exchanges and brokers in enabling unfairness. She announced the initiatives even as she said U.S. markets aren’t rigged and serve the goals of retail and institutional investors.

As an Operational Risk Management (ORM) professional, you have to stay on the edge.  You must imagine the future and dive into the current R&D of innovation.  Being a futurist is staying on the bleeding edge of technology and this is just one facet of the risk mosaic.  The other and more human factor oriented component are the TTP's.  Tactics, Techniques and Procedures (TTP) are what you need your own "Opposition Research" team to be studying.  This is your opportunity to gather the intelligence on your competition and simultaneously look at your own vulnerabilities.  Sam Mamudi and Keri Geiger explain:

The U.S. Securities and Exchange Commission cited Wedbush Securities Inc. and Liquidnet Holdings Inc. for violations of stock market rules, taking tangible steps a day after Chairman Mary Jo White outlined her plan to improve Wall Street trading. 

Wedbush, which the SEC said is among the five biggest Nasdaq Stock Market traders, failed to vet clients who broke the law as they placed billions of dollars of transactions in the stock market, the regulator said. Two current and former Wedbush executives, Jeffrey Bell and Christina Fillhart, were also targeted in the complaint. 

Liquidnet, one of the biggest independent dark pool operators, agreed to pay a $2 million fine for not living up to client secrecy standards on its private trading platform.

So what?  The Rise of the Machine Traders:

In the beginning was Josh Levine, an idealistic programming genius who dreamed of wresting control of the market from the big exchanges that, again and again, gave the giant institutions an advantage over the little guy. Levine created a computerized trading hub named Island where small traders swapped stocks, and over time his invention morphed into a global electronic stock market that sent trillions in capital through a vast jungle of fiber-optic cables. 

By then, the market that Levine had sought to fix had turned upside down, birthing secretive exchanges called dark pools and a new species of trading machines that could think, and that seemed, ominously, to be slipping the control of their human masters. Dark Pools is the fascinating story of how global markets have been hijacked by trading robots--many so self-directed that humans can't predict what they'll do next.

So how do you mitigate the potential risk of a rogue algorithm? Some have devised a mechanism called a circuit-breaker. In other words, an alarm that something is not normal. Let's slow down until we can understand what is going on here. What are some other ways that we could potentially address the threat or the vulnerability? Was the "Flash Crash" a weak signal of a pending melt down of the complete system?

Or is this just the next natural phase of the future growth curve.  Who will you put your faith in for your next "Trust Decisions"...