Role of an Exchange: Monitoring in U.S. Markets
The capital markets have been a force for good in the world -- they've democratized access to the financial world, held companies accountable for their performance, and opened a pathway for millions of everyday investors to grow and manage their wealth.
But the reality is that there are bad actors who seek to leverage the markets for ill-gotten gains, and this is where Nasdaq Surveillance plays an active role in protecting the markets for all investors.
We monitor three equity markets and six options markets with real-time surveillance, as well as post-trade surveillance for unusual market activity.
The types of manipulative behavior that surveillance departments monitor are: Insider Trading, Fraud and Manipulation, including through trading, such as with "pump and dump" schemes, which encourage investors to buy shares in a company to create artificial price inflation, and then selling their own shares while the price is high. We also watch for order book manipulation like spoofing and layering. Spoofing is when someone places an offer on a stock, with the intent of cancelling before the order is executed, and layering is when a trader places multiple orders to create the false impression of heavy buying or selling. We also handle other events such as clearly erroneous transactions.
The accessibility of the markets and the increase in the number of investors, along with the exponential increase in data quantities, has given market manipulators an opportunity to deploy strategies using their own technology. This can create a perfect ecosystem where they can hide amongst the noise.
Because of the massive amounts of data that markets generate, the surveillance teams use automated systems to capture trading that deviates from the norm. The surveillance program runs over 40 different algorithms in real-time, looking for market abuse and manipulation. These patterns have sophisticated algorithms that use approximately 35,000 distinct parameters.
In addition to real-time surveillance, there are over 150 patterns covering post trade-surveillance, which are used to identify a wide range of potential misconduct.
We do this across equity and options markets, with some market-specific alerts and some alerts encompassing data from all markets. The team proactively develops tools and procedures to constantly increase the quality of surveillance and to meet changing demands in the marketplace. Our job is to protect all market participants from those who would seek to abuse and degrade what makes our capital markets special, and it requires the deployment cutting-edge technology to stay ahead of those who would do us harm. It's a mission that we undertake with the utmost seriousness.
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