Nasdaq, Inc. (NDAQ) is acquiring Sybenetix—a London-based company that uses advanced technologies such as artificial intelligence (AI) and behavioral analytics to offer market surveillance and compliance monitoring systems. The acquisition is slated to further strengthen Nasdaq’s arsenal against attempts of market manipulation (e.g., layering and spoofing), various forms of market abuse (e.g., insider trading) and financial crime to offer better services in an environment of increasingly complex regulations.
Here’s a look at Nasdaq’s move to acquire Sybenetix against the backdrop of evolving regulations since 2008-09 and the rising integration of financial institutions with advanced technology.
Regulations, Policies & RegTech
The web of regulations, polices and scrutiny in the financial markets has grown more complex since the 2008 financial crisis; Market Abuse Regulation (MAR), Markets in Financial Instruments Directive (MiFID II), and Dodd-Frank Wall Street Reform and Consumer Protection Act are some of the regulations that have come into effect over these years. The evolving regulative landscape has led to ‘regulatory compliance’ becoming one of the major challenges for entities in capital markets.
The growing scrutiny and fear of compliance failures (and fines), risk of reputational damage, and operational costs are giving way to a major structural and technological shift across the industry.
One such trend is the emergence of regulatory technology, aka RegTech. Financial Industry Regulatory Authority (FINRA) defines RegTech as a subset of FinTech, “covering new and emerging technologies that assist the financial services industry in meeting its regulatory compliance obligations, in a faster and more cost-effective manner.”
Right from compliance monitoring, fraud detection and data management (including access, storage, and reporting) to identification and interpretation of regulation, the range of applications that can be tapped via RegTech is immense.
The rise in RegTech is evident from the increasing number of startups and deal activity in the space: estimates suggest that a record 102 deals were recorded in 2016 with funding reaching $732 million. ‘Emergence of RegTech’ is among the top 10 trends in capital markets in 2017 as per a Capgemini report.
Collaborations So Far
Nasdaq, the world's first electronic stock market, is home to approximately 3,900 total listings with a market value of approximately $12 trillion.
Nasdaq’s risk and surveillance offerings already include SMARTS and TradeGuard; SMARTS powers surveillance and compliance for 47 marketplaces, 17 regulators and 140 market participants across 65 markets globally while TradeGuard is a comprehensive risk management suite. Australia-based SMARTS was acquired by Nasdaq back in 2010.
Nasdaq has been a pioneer in using advanced technologies. It entered an alliance with Digital Reasoning offering industry-leading cognitive computing platform, Synthesys in 2016. The strategic tie-up was done with the intention to bring Digital Reasoning’s natural language processing and machine intelligence based technology to the data and detection capabilities delivered by SMARTS to offer more efficient surveillance solutions.
Digital Reasoning’s Synthesys has delivered impressive results to institutions including UBS, Goldman Sachs, Point 72 and many others “with documented outcomes such as a 250% increase in detection acuity, 50% reduction in false positives, and a quadrupling in efficiency making it feasible to extend electronic communications surveillance to 100% of employees.”
Now, Sybenetix is set to complement and reinforce Nasdaq’s surveillance offerings. “We believe behavioral science, cognitive computing and machine intelligence are essential to a successful, holistic surveillance offering and critical to efficient and effective organizational compliance with an increasingly intricate global regulatory environment. This acquisition accelerates our offering to the buy-side and advances our ambitions to expand market integrity controls into all segments of the capital markets,” Adena Friedman, President and CEO of Nasdaq, said.
With Sybenetix, Nasdaq will be better equipped to resolve key surveillance challenges facing the asset management industry. The acquisition will thus help it to gain ground and establish itself in the asset management segment.
While Nasdaq is leading the way, other exchanges (such as London Stock Exchange) and the regulatory authority FINRA are embracing advanced technologies. FINRA, which currently processes an average of 50 billion—and up to 75 billion—transactions every day is already using big data, cloud computing and analytics, and is expected to use AI in coming times.
Such increase in technology savviness of stock exchanges will accelerate detection of market manipulation and compliance breaches. Overall, precision in finding any deviousness will boost client confidence, reduce penalties and costs, while smoothening conduct of operations.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.