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3 Significant Trends Facing Trade Surveillance Teams

Three Significant Trends Facing Trade Surveillance Teams Now

Constant market structure innovation combined with new tradable instruments continues to breed complexity for risk and surveillance teams trying to maintain the reputation and integrity of their organizations. It can be a scary place out there for market constituents of all kinds that don’t have the proper tools in place to manage the data and cross-market, cross-asset analysis needed to meet the requirements of the regulators.

Things like social media, HFT and dark trading venues of course complicate matters more and more. When we look across our client base and those firms where we are engaged, we see three significant challenges facing surveillance teams now:

1. Between instruments, not just across. Global regulatory focus is way beyond the requirement for cross-asset monitoring across securities/assets and their associated derivatives, and onto the need for firms to monitor for market abuse between a traded instrument and all other instruments globally with which it shares an economic relationship. The effect of this can really be seen in a scenario like Insider Trading, where the market participant now needs to monitor both for trading in the security/asset and its related options/derivatives prior to a price sensitive announcement AND the expectation is that it will also have a view across trading in all related OTC instruments (swaps, bonds), spread betting, instruments that tie their settlement price to that security/asset etc.

2. Marriage of trade data with various unstructured inputs. The need to bring together the output from trade surveillance systems and the various repositories of unstructured and electronic communications data has never been greater. Regulatory guidance is headed towards the need for complete trade reconstruction in many jurisdictions. To this end, the consolidation of trading data, alert scenarios and related electronic communications (including voice), is an important and challenging step.

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3. More constituents are facing regulatory scrutiny. If your entity is trading, your organization can come under regulatory scrutiny. All market segments need to take responsibility for monitoring of their order flow and trade executions Buy-side firms can no longer rely on their sell-side partners to conduct surveillance on their behalf, and even within sell-side firms, the front-office is taking on broader responsibility as well.

Front-office staff must beware. Explicit regulatory requirements and expectations are on the way that require front office/execution desk of ALL market participants (not just the sell-side) to take direct responsibility for real-time monitoring of the order flow that is generated from their electronic trading platforms.

Equally, as mentioned earlier, there is an expectation that the buy side segment of the market is bound to carry out its own monitoring, whether it is trading directly into the market, or via the sell side – with a particular focus around insider trading related issues.

A third market segment where we are seeing a lot of regulatory activity around dark pools and MTFs, specifically in Asia, but also with recent announcements from the FCA. As venue operators, firms must have (1)effective arrangements and procedures, relevant to the MTF, for the regular monitoring of the compliance by its users with its rules; and (2) monitor the transactions undertaken by its users under its systems in order to identify breaches of those rules, disorderly trading conditions or conduct that may involve market abuse”( MAR 5.5.1(1) and (2)).

To learn more about these trends, see our resources below:


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Michael O’Brien is Head of Product Management for SMARTS Trade Surveillance at Nasdaq.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.