The growing difficulty in detecting ever more complex illicit trading behaviors continues to increase. As regulatory bodies deploy advanced methods to investigate suspicious activity that are data-driven and make use of technologies like AI, they are seeking data from firms that is more granular than ever before and are levying increasingly severe penalties for non-compliance.
Firms are having to rethink how they can assess, prioritize and allocate resources to best meet the challenges of a rapidly evolving regulatory landscape.
With regulators across the US and EMEA conducting increasingly sophisticated case examinations using advanced analytics and deep data-sets, the need to operate trade surveillance controls in a holistic coordinated manner has emerged.
Regulators are applying new techniques to investigate abuses in correlated products such as cash instruments and their associated derivatives, across multiple transnational trading venues.
How can firms meet the challenges?
Trade Monitoring Systems
Ensure that the most appropriate systems are implemented to meet business needs. Often, firms end up with varied siloed solutions across different asset classes and regions adding unnecessary complexity. Opportunities for consolidation and simplification should be realized.
Market Abuse Detection
Develop and employ algorithms and models for the detection of market abuse, including unusual trading patterns, layering, spoofing, and other manipulative practices. The system should be adaptable to changing market conditions and new types of abuses that emerge.
Risk-Based Approach
Adopt a risk-based approach to surveillance, focusing resources on higher-risk activities and clients. This involves setting risk thresholds, conducting risk assessments, and prioritizing alerts based on their potential impact on market integrity.
Technology, Data Quality and Automation
The efficiency and effectiveness of surveillance systems are reliant on the quality of data they ingest. Data architecture should be designed to ensure quality and completeness of data before it is consumed. Aggregating and cleansing all data from varied sources can enable maximum automation, assisting the processing of large volumes of data and reducing manual processing.
Periodic Reviews and Enhancements
Regularly review and update surveillance processes and systems to adapt to changing market dynamics and emerging risks. Periodic assessments can help identify areas for improvement and ensure that surveillance measures remain effective.
Common Pitfalls
Often, as businesses grow, a patchwork of different surveillance controls and vendor solutions integrated into a firm’s workflows evolves organically, without strategic planning.
Firms can quickly outgrow vendor solutions that were once appropriate to meet their business needs, so it’s prudent to regularly evaluate and assess that the most appropriate tools are being employed and rationalize wherever possible.
For instance, there may be multiple surveillance technology solutions in operation across different product types and regions such as US / EMEA / APAC, leading to:
Overlapping capabilities across vendors
Wasted costs through maintenance/support and license fee expenditure
Additional needless complexity to business processes
From a governance standpoint, fragmentation in ill-defined roles and responsibilities can occur across the first and second lines of defense (Supervisory vs Compliance advisory functions) and across regions.
Many firms are now seeking to build their target operating model across the first and second lines of defense from the ground up, by taking a risk-based approach to design and benchmarking to their peers to ascertain best practices.
Trade Surveillance Target Operating Model and Key Challenges
It is imperative that firms implement a trade surveillance architecture that is specifically tailored to meet their needs
This means not only choosing the right vendors or platforms, but making sure the supporting processes and governance procedures are sound, and that all asset classes are adequately supported. The framework should be scalable to meet future business growth and be adaptable to changes to the regulatory landscape.
How Can RegEdge Help?
RegEdge has a proven track record of assisting firms in navigating the increasing complexity within the trading surveillance ecosystem. Our team offers regulatory and market-specific expertise, along with an agile technology team that can work seamlessly by partnering with your business, compliance, and technology teams. We have deep relationships across the vendor landscape, and with your peers, and can help you make informed decisions on the best solution for your business, based on real-world examples and insights.
Perform a health check or conduct independent risk assessments on your existing trade surveillance ecosystem
Perform end to end technology & data assessments, design and implementation of data governance and surveillance technology strategy
Assist with vendor evaluation, vendor proof of concepts, business and data analysis, testing and program management for surveillance implementation across asset classes
Assist with designing the target operating model, governance framework and establishing clear roles and responsibilities
Assist with calibrating the surveillance parameters, and right tuning the logic based on your business needs and risks to optimize alerts
Design analytical reporting and visualization tools to aid with surveillance alert investigations
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