Regulatory Roundup: 2025 IOSCO Review Assesses Market Surveillance Landscape

Analysis

2025 IOSCO Review Assesses Market Surveillance Landscape

In this month’s Nasdaq Regulatory Roundup, we look at how regulators have handled the market surveillance challenge.

Back in 2013, IOSCO’s comprehensive report on the technological challenges of market surveillance set the stage for industry-wide standards, addressing everything from cross-asset monitoring to clock-synchronization. This pivotal document not only shaped the industry but also influenced my own views. 

Fast forward to February 2025, IOSCO has released a thorough review assessing how market authorities have implemented the 2013 recommendations.  

So, for this month’s analysis, let’s revisit the core objectives of market surveillance, examine the factors that have kept it at the forefront of regulatory priorities and highlight key takeaways from the latest 2025 review.

Key Takeaways

• The 2025 IOSCO review reveals significant advancements and persistent gaps in global market surveillance capabilities.
• Data access and technological challenges remain critical issues for regulators in today's increasingly fragmented markets.
• IOSCO's new focus on Artificial Intelligence marks the next frontier in market surveillance and regulatory innovation.

The 2000s: HFT, Algo Trading, DEA, Market Fragmentation, Dark Liquidity and the Flash Crash

The 2000s were, like today, a transformative era for financial markets, marked by rapid technological advancements that reshaped trading dynamics. Algorithmic and High Frequency Trading (HFT) surged in popularity, alongside the rise of direct electronic access (DEA). Concurrently, markets experienced fragmentation, with significant trading volumes shifting into dark liquidity pools.

This period of innovation and disruption reached a dramatic climax with the Flash Crash of 2010, where 8,000 US equity securities plummeted 5-15% in minutes, only to rebound just as swiftly. The aftermath required months of meticulous data collection and analysis to unravel the causes. While the Flash Crash is now well-documented, it’s less known that similar, smaller-scale crashes occurred globally for years, underscoring that this was not an isolated or US-centric phenomenon.

The exponential increase in risks associated with illegal or inappropriate conduct, driven by technological change, posed significant challenges for regulators. They sought to mitigate these risks without stifling innovation, turning to market surveillance as a critical tool. The primary objective of market surveillance is to ensure fair and orderly markets—a mission that has become even more crucial in this new trading environment. However, market surveillance programs themselves faced new technology-driven challenges, setting the stage for the 2013 IOSCO report.

The 2013 IOSCO report provided eight core recommendations, which I’ll paraphrase for clarity:

1. Monitoring Capabilities: Market Authorities (MAs) should have the capability to monitor the venues they supervise, including identifying market abuse and activities that impact fairness and orderliness.
2. Regular Reviews: MAs should regularly review their capabilities, especially in light of technological advancements. 

3. Data Access: MAs should have the capability to access the data needed for market effective surveillance.  

4. Customer and Participant Association: MAs should be able to associate each order and transaction with the respective customer and market participant.  

5. Usable Data Formats: MAs should require that data needed for market surveillance be provided in a usable format.

6. Data Safeguards: MAs should implement appropriate safeguards to protect the data. 

7. Clock Synchronization: MAs should consider requiring clock synchronization to ensure accurate timestamping of transactions.

8. Cross-Border Surveillance: MAs should strengthen their cross-border surveillance capabilities to address the global nature of modern trading.

The 2025 Review: Navigating New Technological Factors in Market Surveillance

The 2025 review propels us 12 years forward into another era of remarkable technological evolution, assessing how effectively jurisdictions have implemented the 2013 IOSCO recommendations. The report reveals that while most jurisdictions have taken significant steps, less developed regions remain understandably less compliant, highlighting a disparity in global regulatory progress.

Several findings emerge from the review regarding surveillance capabilities. Market fragmentation has persisted, with trading becoming more dispersed than ever. Additionally, a substantial number of jurisdictions still lack cross-market or cross-asset monitoring capabilities. Modern technology has facilitated the creation of complex multi-asset, multi-market manipulation schemes, demonstrating the heightened importance of these capabilities compared to 2013.

The review also uncovers notable supervisory gaps. Many jurisdictions struggle with missing data, such as ultimate customer information or data from foreign markets. Additionally, entire venues or asset classes, including OTC markets, bonds, structured products and cryptocurrencies, often fall outside regulatory purview. Previous Regulatory Roundup analyses have shown the interconnectedness of financial markets, where issues in one area can ripple across others, and fraud can be obscured by dispersing proceeds across various asset types.

Technological challenges continue to pose a significant hurdle for many jurisdictions. Handling the sheer volume of data generated by HFT activity remains a formidable task, with 33% of respondents flagging capacity concerns. Furthermore, 62% of respondents reported lacking formal or legal requirements for identifying transactions based on algorithmic execution.

Reflecting on the progress between 2013 and 2025, we can see substantial advancements in surveillance capabilities. However, this period has also seen the market evolve and become exponentially more complex, introducing new risks and challenges. Despite the strides made by market authorities, the scope of their mission has expanded, necessitating ongoing adaptation and vigilance.

As the report concludes, it acknowledges that while the challenges from 2013 are still being addressed, a new IOSCO workstream focused on Artificial Intelligence (AI) is emerging, signaling the next frontier in regulatory innovation.

March Capital Markets Regulatory Updates

14 March: The SEC announced a six-month extension of the compliance dates for amendments adopted in September 2023 to the Investment Company Act “Names Rule,” which addresses fund names likely to mislead investors about a fund’s investments and risks.

12 March: The International Organization of Securities Commissions (IOSCO) published a new consultation report examining the increasing use of AI in capital markets, identifying five key findings related to decision-making processes, internal operations, risks, industry practices and regulatory responses. 

6 March: The Hong Kong Securities and Futures Commission (SFC) released its quarterly report, reporting strong market performance in 2024, Hong Kong-domiciled funds seeing 88% growth in net inflows and enhanced market connectivity. 

3 March: The SEC's Crypto Task Force announced a series of public roundtables called "Spring Sprint Toward Crypto Clarity," beginning March 21st with a discussion on defining security status in crypto assets. 

1 March: The Securities and Exchange Board of India (SEBI) appointed Shri Tuhin Kanta Pandey as Chairman of the regulatory body. Shri Pandey brings over three decades of expertise in various government roles and economic sectors. 

27 February: The SEC's Division of Corporation Finance determined that "meme coins," which are crypto assets inspired by internet memes and typically purchased for entertainment purposes without functional utility, do not qualify as securities under federal securities laws and therefore don't require SEC registration. 

27 February: The SFC proposed increasing position limits for three major Hong Kong exchange-traded derivatives to enhance market flexibility and competitiveness. 

25 February: The CFTC's Division of Enforcement introduced a new matrix system to evaluate and reward companies' self-reporting and cooperation efforts, offering penalty reductions up to 55%.

Latest Enforcement Actions and Fines

• The Financial Industry Regulatory Authority (FINRA) fined Robinhood Financial and Robinhood Securities a total of$29.75 million for multiple regulatory violations, including inadequate supervision of clearing technology system, anti-money laundering failures, and misleading communications by social media influencers.