WALDATA: Wavelet transform based adversarial learning for the detection of anomalous trading activities

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Detecting manipulative activities in stock market trading poses a significant challenge due to the complex temporal correlations inherent to the dynamically changing stock price data. This challenge is further exacerbated by the limited availability of labelled anomalous trading data instances. Stock price manipulations, which consist of infrequent anomalies in stock price trading data, are challenging to capture due to their sporadic occurrence and dynamically evolving nature. This scarcity and inherent complexity significantly complicate the creation of labelled datasets hence hinders the development of robust detection of different stock price manipulation schemes through supervised learning methods. Overcoming these challenges is crucial for enhancing our understanding of market dynamics and implementing robust market surveillance systems. To address these challenges, we introduce a novel stock price manipulation detection approach called WALDATA (Wavelet Transform based Adversarial Learning for the Detection of Anomalous Trading Activities). We leverage the Wavelet Transform (WT) to decompose non-stationary stock price time series into informative features and capture multi-scale dynamics within the data. We encode stock price data by transforming it into scalogram images through the Continuous Wavelet Transform, effectively converting stock price time series data into a 2D image representation. Subsequently, we employ a Generative Adversarial Network (GAN) architecture, originally applied to computer vision, to learn the underlying distribution of normal trading behaviour from the encoded images. We then train the discriminator as an anomaly detector for identifying manipulative trading activities in the stock market. The efficacy of WALDATA is rigorously evaluated on diverse real-world stock datasets using 1-level tick data from the LOBSTER project and the experimental results demonstrate the significant performance of our approach achieving an average AUC of 0.99 while maintaining low false alarm rates across various market conditions. These findings not only validate the effectiveness of the proposed WALDATA approach in accurately identifying stock price manipulations but also provide investors and regulators alike with valuable insights for the development of advanced market surveillance systems. This research demonstrates the promising potential of combining wavelet-based feature extraction and stock price time series to image representation with generative adversarial learning frameworks for anomaly detection in financial time series data. The successful implementation of WALDATA contributes to the development of advanced market surveillance systems and paves the way for further advancements in market surveillance, contributing towards a more efficient and robust financial system and a fair market environment.