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The Importance of Trade Surveillance on the Buy Side

By Scott Burke, Regulatory Product Manager, RIMES Technologies

The past year has been met with ongoing market volatility, pushing many control environments to the brink and beyond. From the changes brought upon by Brexit, uncertainty around the US election, as well as the ongoing issues of a global pandemic, two things remain clear. 

Firstly, the market isn’t waiting for control environments to adapt; trading volumes show no signs of slowing down. According to Piper Sandler, trading volumes are up 92% year on year in January alone. The “rising tide” created by strong liquidity and upward trends will undoubtedly create significant volatility in certain market segments when sentiment shifts. Secondly, as the industry accommodates a shift in ways of working, conditions are increasingly ripe for market manipulation and insider trading. Firms will need to ensure that they are prepared with adequate systems in place to adapt to adversity that the marketplace presents during periods of change.

Gaps and inefficiencies in the market

The increase in trading and a shift to remote working has exposed inefficiencies within the market. Historically, firms tend to push compliance and regulation to the bottom of their priority list, often doing the bare minimum and waiting for explicit guidance or events. However, the need to monitor trading and related communications cannot be reactive.

Research from cybersecurity firm Bitglass has shown that 50% of organisations lack visibility into messaging and file-sharing apps, providing a prime opportunity for monitoring gaps. While this has been an ongoing issue, circumstances created by ongoing volatility have introduced new challenges for market participants managing risks around identifying, handling, and disclosing insider information. Compliance Officers and Supervisors have become more reliant on technology during this time, while the gaps in what they can see and how they can see it haven’t closed.

Regulators recognize this and have been advertising what is expected of firms. When the UK government ordered people to work from home, the FCA warned that anyone handling inside information was expected to continue “to act in a manner that supports the integrity and orderly functioning of financial markets”. With the FCA’s grace period coming to a close, firms that do not have the proper controls in place are more likely to be subjected to thorough inspection and accumulate costs incurred from market manipulation. 

The effect on the buy-side

Adjusting to the new landscape has been something that has had an effect on all sectors within the financial industry, including the buy-side. In the last five years, sell-side investment in the area of regtech was entering a boom phase. However, adoption from the buy-side has been slower, putting it at a disadvantage.

The buy-side is faced with a shorter amount of time to implement surveillance, which the sell-side has long prioritised and set a precedent of expectations with Regulators. Surveillance technology has and will continue to mature – its availability and sophistication particularly. Firms need to be aware that it is unlikely there will be leniency on timings for implementation, given the technology to monitor devices remotely already exists. Further, a last-minute race to implement technology when critically required, rather than future proofing for what we know will come down the line, will increase the operational burden on IT and compliance resources to implement changes. In cases of market abuse violations, one of the first things that regulators want to see are the systems and controls that a firm had in place to catch these activities. Firms that can demonstrate that they have invested in robust automation capabilities will put them in a stronger position to answer to ongoing regulatory changes and as a result, avoid damaging penalties.

A holistic approach to trade surveillance

But coordinating controls to accommodate evolving surveillance needs is much easier said than done. Managers also have to keep a handle on the influx of data, making informed decisions for business needs and an added focus of trade surveillance can be a strain on resources. Ensuring that surveillance implementation is not just accomplished but also “fit-for-purpose” is the balance every firm must strike.

Communications and trading are key components of a surveillance program and are inextricably linked, particularly for market abuse reviews. The requirement to access disparate platforms routinely creates a natural need for linkage. Firms now have access to technology that can alleviate the pressures to introduce strict controls within a business. Integration of multiple datasets can help in a number of ways and the technology now widely available is ideally suited to analysing large quantities of data rapidly. This is a key benefit for identifying market manipulation events, which demands relating large and diverse datasets.

Automating analysis and workflow around trade surveillance drastically reduces the burden of collating data. In doing so, this increases the time Compliance Officers and Supervisors can spend on executing their actual job of assessing and making critical risk decisions. 

Moving forward in the “new normal” 

Many firms are still wrestling with legacy technology while being met with challenges in managing and processing data to meet their regulatory requirements. As ongoing uncertainty in the current environment continues and grace periods come to an end, firms must prioritise the issue of trade surveillance, specifically with market abuse risks continuing to increase. 

By leveraging surveillance technology now widely available, firms can stay a critical step ahead and ensure that they are protecting their brand by keeping pace with a dynamic regulatory environment. 

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