The Challenge Of Global Market Surveillance
With Greg Yanco, Senior Executive Leader, Markets & Participant Supervision, Australian Securities & Investments Commission.
We are really excited to have the market surveillance technology that allows us to take control of our destiny. It is much more flexible than our old system in terms of parameters and it is also more dynamic. We have people trained in using the language that the system uses which enables us to generate our own alerts and reports.
The system is being developed by First Derivatives. Their ‘bread and butter’ clients are high frequency traders so we are now applying the same technology and capabilities as people who are using our markets (in terms of putting a lot of the orders on). This is an exciting development and enables us to carry out more flexible, intensive analysis which goes beyond real time supervision, beyond waiting for alerts to pop out.
We could do some of these things with the old system but the new system does seem much quicker and more flexible. We are bringing ourselves up to the same standard of capabilities already being exhibited by other markets and we’re still only part of the way into looking at the new system.
The next stage will be the development of more sophisticated data analytics and data mining capabilities. This means not relying so much on real time supervision but looking back at patterns over time. We have a real time system that pops up alerts in place. For example, say someone had traded before an announcement was made. We can find out who could have had access to that information and whether we might have overlooked that person previously. We want to be able to look back and discover historical patterns of behaviour as we are then in possession of much more powerful information. It’s the same with manipulative activity.
What we are working on now is post-trade analysis where we go back over time and look for serial misbehaviour. We have been able to find patterns in trading previously. It took an incredible amount of work to actually figure out that patterns occurred elsewhere and it would have been good to be able to tell the system to go back and look for a particular pattern. These are the sorts of things that have brought us up to the front of the curve in terms of capability.
The new system gives us some of that capability but we are also getting access to other less structured data and relationships. We have one of the biggest databases in the region and so have direct access to a lot of information needed rather than us having to constantly pester brokers for information. We are using whatever we can find that we already access to identify relationships and matching that to the trading. This is a somewhat more sophisticated than just the new surveillance system.
Regulators tooling up
A new system is all very well but it will only operate efficiently if it is staffed by people who understand what is going on. We have been building our skill set and now have ex-traders, ex-electronic traders, market makers, and real rocket scientists. We are developing staff with skills to understand the industry, the trading, to know who they are dealing with and the ability to use those tools appropriately. We have been concentrating on scaling up the staff skill set in the same way as we have the technology.
We also spend time working with other regulators discussing the capabilities that we have that we can share.
Understanding the market
What we do is spend time talking to people in the market so they know that we are observing the market. We talk to the electronic traders so we get a really good understanding of who their clients are and what they are doing. This gives us an understanding when something goes wrong of what the problem might have been; we might have understood the strategy behind that sort of execution. We quite deliberately communicate regularly with the industry; we publish statistics on referrals we have made, enforcement actions. We put out quarterly statistics on the shape of the markets, including order to trade ratios and a six monthly market supervision report. We are talking on a daily basis about what is going on in the market, particularly with regard to electronic clients.
The HFT and dark pools review
We were pretty happy with the outcomes of both the HFT review and dark pools discussion. We use analytics as the basis of how opinions are formed and the decisions that are made. We think our expertise, particularly with regard to HFT, has given the market confidence. In our opinion HFT is not the problem everyone thinks it is. In fact, there was an issue with the quality of some of the buy-side algorithms and the ‘noise’ they were creating. Essentially the algos were more of a problem than the HFT firms, who were generally pretty efficient, apart from a few who might have been guilty of not having the appropriate filters etc. But in general, I think we were fairly happy with the outcome.
The new system and its capabilities enables us look at market replays – it might take us a little time, but we can look at replays of markets right down to the micro-second level; it is as though it were just normal trading. There are some systems attempting to influence other systems and we have spoken to high frequency traders who are having to defend themselves against these sorts of things. But currently, I think they are pretty much there, however tomorrow may see something else that blows everything out of the water so we need to keep up to speed with the market and ensure everyone is doing their bit to maintain market integrity.
Global regulatory cooperation
We are involved with inter-market surveillance group meetings where we talk about the different types of behaviour we have witnessed. We might spend a few hours discussing one particular alert type in detail. We are in regular discussions with FINRA, IIROC and FCA with whom we share much of our thinking. We benefit from their experience as they have been in this business much longer than us.
This dialogue is important to us particularly with regard to how the processes work and trading patterns etc; these are ideas that FINRA, IIROC and FCA have shared with us. They have also alerted us to people that have been misbehaving in their markets.
For example, we had an online broker hacking incident recently through three brokers in one day. We had been discussing this at the inter-market surveillance group so as soon as we saw it, we knew what was happening. One of the regulators was able to help us track the money flow, all the way back to somewhere in Eastern Europe and the behaviour was stopped immediately. So it was through those relationships that, firstly we knew what was going on, and secondly we were able to follow the money trail.
This can happen because there’s an established network of relationships at the regulator level. The key message is that we are moving from real time identification of one person who might have done something once or twice to a more structured integration between real time surveillance and daily, weekly, quarterly, annual, thematic work. This is where we go back over the database and look at what is going on, look at the pattern and ask “where else is this happening?” We look at absolutely everything now – every transaction, every order is looked at by the system – and this will happen more regularly and more rigorously in future.