How IP Tracking Reveals Online Trading Anomalies

Online trading has become a significant center for investors looking to make money from the financial markets, with the total market value reaching $9.55 billion in 2023. This figure is projected to increase from $10.15 billion in 2024 to $16.71 billion by 2032. However, this growth has also increased trading fraud, prompting platforms to use techniques limiting illicit activities. One such strategy is IP tracking.

What Is an IP Address?

For devices to communicate over the Internet, they must be able to find each other. This is why every device connected to the Internet has an Internet Protocol (IP) address.

An IP address is a set of numbers that identifies each device connected to a network. There are two types of IP addresses, IPv4 and IPv6, each with its distinct format and notation. These addresses are essential for identifying the host and determining where a device is located on the network, allowing data to be sent directly to its intended destination.

Additionally, IP addresses play a role in holding users accountable for their online activities. Internet service providers (ISPs) record which IP addresses are assigned to customers at any time. This traceability is why individuals engaging in fraudulent activities often hide their real IP addresses to evade detection and avoid being held accountable.

Using IP Tracking To Detect Online Trading Anomalies

While IP addresses can sometimes help trace the real-life identity of cyber criminals, the primary goal for merchants isn't to enable law enforcement to catch fraudsters after they've completed the act.

Instead, merchants use IP address data in risk scoring, which helps them identify potential fraud more accurately and make more educated judgments about when to reject suspicious transactions.

There are several ways IP tracking can help trading platforms prevent fraud, and they include:

Notifying Users After Suspecting Suspicious Activities

Many people have received emails about suspicious login attempts from unfamiliar locations. This is an example of IP tracking in action. This method assists platforms in detecting trends that could signal dubious behavior or anomalies.

For example, if a trader's account is typically accessed from one region but suddenly displays logins or transactions from another continent, it may suggest unauthorized entry or hacking. In this instance, providers can introduce extra security measures like requesting multi-factor authentication or temporarily limiting access from these suspicious locations to safeguard the account.

Geolocation Assessment

Trading platforms can identify the location of any user using IP addresses to pinpoint the country, region, and city from which a user is connecting to their services. This data can be used to restrict activities from users in some regions or areas that exhibit a more significant occurrence of fraudulent behavior.

Discovery of Market Manipulations

Monitoring IP addresses can help identify market manipulation or insider trading, especially when there is a suspiciously consistent pattern in trades involving a particular currency pair or other assets.

Insider trading threatens the trustworthiness and equity of financial markets. It occurs when people use confidential access to company data to benefit themselves financially through trading. IP tracking can indicate the presence of coordinated efforts from the exact location to buy or sell a particular asset consistently over a certain period.

Due to the vast size of the market, forex trading usually responds to economic factors as anticipated and is less susceptible to insider trading, especially for significant currency pairs.

Identification of Money Laundering Activities

Tracking IP addresses can also help detect money laundering. Online trading platforms can detect money laundering activities by examining where funds are moving geographically, including transfers, deposits, and withdrawals. If large sums of money are regularly sent to or received from locations with a reputation for malicious financial practices, this could raise red flags for possible illicit activities.

IP Reputation Analysis

Each IP address receives a reputation score determined by data reflecting its reliability. Evaluating this score enables companies to assess the likelihood of fraudulent activities originating from that address. Businesses committed to combating fraud and chargebacks often employ fraud tools with risk assessment features to determine whether to approve, reject, or review transactions.

Detecting Proxies and VPNs

Scammers frequently use tactics to hide their identities and locations. One common strategy involves masking their IP address with proxies or virtual private networks (VPNs), making it difficult to track their whereabouts.

While VPNs are often used for privacy protection when browsing from public areas, fraudsters can exploit them to hide their true identities for malicious purposes. Some sites will only allow access to users once they detect a VPN and will give access once the VPN is turned off.

Essential Considerations for IP Tracking

Although IP addresses offer significant information for identifying fraud, it is essential to acknowledge their constraints and consider additional factors in conjunction with IP analysis. Key factors to consider are:

Location Accuracy of IP Addresses

Internet service providers (ISPs) often give users IP addresses that may change over time, especially during IP block relocation. This can make it more difficult to catch fraud if you depend on IP analysis.

Avoiding False Accusations

Tracking IP addresses should be one aspect to consider when identifying suspicious traders. IP addresses can change, be used by a group of people, or be hidden by VPNs or proxy servers.

Depending on IP tracking information only could result in incorrect identifications and unfairly singling out honest traders. IP tracking should be part of a broader risk management plan that considers factors such as trade behaviors, account backgrounds, and other histories.