Trade Surveillance is Challenging, But is There Also a Glint of Opportunity?

Blog entry

If Market Abuse Regulation (MAR) and Markets in Financial Instruments Directive II (MiFID II) extend the breadth and depth of trade surveillance, could they also provide opportunities for firms that get it right? These issues and more were debated during a panel session at last week’s A-Team Group Intelligent Trading Summit in London.

Intelligent Trading Technology editor Michael Shashoua moderated the panel and was joined by Justin Nathan, surveillance technical officer at Credit Suisse; Adrian Hood, regulatory and financial crime expert at The Investment Association; Kevin Taylor, managing director, group head of CIB compliance strategic advisory at UniCredit Group; Dermot Harriss, senior vice president, regulatory solutions at OneMarketData; and Adrian Guest, sales manager EMEA at b-Next.

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The panel set the scene for discussion with a snapshot of surveillance extension, noting that MAR and MiFID II add surveillance for instruments traded off as well as on regulated markets, and cover a broader range of assets and trading venues including Multilateral Trading Facilities (MTFs) and Organised Trading Facilities (OTFs). Surveillance is no longer focussed on the sell-side, with buy-side firms including brokers and asset managers being brought into the scope of the regulations. The concepts of attempted and intended market manipulation are also introduced, along with increased disclosure requirements.

Looking at the extent of MAR and MiFID II surveillance, Taylor commented: “The regulations stop short of a requirement for automation, but firms will need automation to meet their scope and obligations.” In terms of difficult obligations to meet, Nathan highlighted intent to manipulate markets as it is so tough to proof.

With surveillance pushing into the buy-side, Guest described the need for firms to set up projects with an emphasis on monitoring insider trading, while firms already running surveillance programmes need to identify and fill gaps. The quality of data is critical.

Considering how surveillance can be demonstrated, Nathan said: “Numbers are superficial. As a member of a surveillance team, you need to know that your system is effective and efficient.”

Taking this to the next level, Harriss outlined the opportunities of MAR and MiFID II surveillance, saying: “Firms are not thinking well about MAR and MiFID II if they are not thinking of the regulations as a revenue opportunity. The transparency required means customers will have better metrics to make choices. When that happens, for example in best execution, there are revenue opportunities.”

At this point, a request for a show of hands on whether firms consider surveillance to be a trading or compliance issue revealed that surveillance is driven in most firms by compliance rather than trading, suggesting it is not yet on the strategic agenda. That said, panel members took different views on whether responsibility for surveillance should lie with trading, but all agreed that wherever responsibility lies, trading should understand surveillance.

While the need for surveillance is increasing, finding technology solutions is not always easy. Guest concluded: “Big banks are challenged by monitoring all their systems including what people say. Solutions are evolving towards this, but are not yet very advanced.”