How to Monitor for Insider Trading

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On 9 November, Nasdaq and Aite Group hosted a webcast on how to monitor for insider trading, focusing on how to prevent the threat in asset managers and hedge funds.

Michael O’Brien, Head of Product Management for Risk & Surveillance Solutions at Nasdaq, moderated the discussion along with Paul Young PhD, Head of Buy-side Product Development for Risk & Surveillance solutions at Nasdaq, and Danielle Tierney, Senior Analyst at Aite Group.

Regional Differences with Insider Trading & Buy-side compliance Culture

Insider trading is the primary risk for market manipulation on the buy-side. Not only are firms susceptible to substantial fines and penalties, the harm that insider trading can do to a firm’s reputation is catastrophic, amounting to much more damage than the fines and penalties themselves. In the United States, insider trading centers on the violation of a fiduciary duty, which strikes at the core of most buy-side firms. In order for a case to be considered insider trading, two conditions must be met: trading on the basis of material, non-public information, and violating a fiduciary duty to the investors with which the trade occurs.

The European Union (EU) takes a slightly different approach, prohibiting those in possession of inside information from dealing in related securities. Traders cannot disclose information to third parties unless the disclosure is made in the normal course of employment, profession or duties. EU regulation has the largest overall concern for upholding to regulatory requirements, with firms in this area of the world anxiously awaiting the most challenging new regulation to date, MiFID II.

With recent regulatory requirements becoming more prominent for buy-side firms, compliance has had a ‘seat at the table’ in regards to important decisions, empowering compliance officers within their firm. Compliance standards are no longer considered a mere ‘checklist’ item, but rather a highly important task that must be completed with due diligence. Compliance officers are frequently contributing to prospect pitches, and have close coordination with both the front and back offices.

Detecting Insider Trading

Multiple contact points are used in order to understand the investment decision, overall determining whether a trading pattern could fall victim to insider trading. For example, contact points where non-public, price sensitive information can enter the firm, and analyzing where the portfolio manager (PM) ‘crosses the line’ from high quality insight into potential market abuse, factors into mapping and understanding the behavior of portfolio managers. As a result of rogue trading behavior, alerts are generated, signaling to compliance teams that the PM’s behavior needs to be monitored. Electronic communications (eComms) monitoring is key to detecting insider trading; with a holistic integration of surveillance software is key to prevention and maintaining organizational conduct.

Understanding the Insider Trading Detection Challenges

With firm reputation at stake, insider trading is a top fear for asset managers and hedge funds. With the upcoming implementation of MiFID II, regulatory requirements are at the top of firms’ agendas, increasing the functional importance of buy-side compliance departments and transforming compliance officers to become more empowered and take part in strategic discussions. Insider trading detection involves multiple points of monitoring, including information contact points, investment decision-making, and both internal and external communications monitoring. E-comms surveillance, in particular holistic multi-channel monitoring, is key to all avenues of insider trading detection. Nasdaq Buy-side Compliance’s behavioral analytics model applies algorithms to individual decision making to provide a holistic behavioral analysis of market abuse, conduct risk, and investment performance, eliminating false positives and providing instant insight based on individual behavioral profiles.

To learn more about Nasdaq Buy-side Compliance, please visit:

Listen to the recording of the webcast:

Read our whitepaper on insider trading:

Read Nasdaq’s 2017 Global Compliance Survey:

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

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