Posted by Dan Hubscher
The ticket to preventing and deterring rogue trading could well be technology. Although most financial services firms have some form of surveillance and monitoring technology in place, it isn't good enough to keep them from getting kicked off the regulation train.
Financial services firms risk running afoul of new regulations because their technology is not the "right" technology anymore. The burning question now is – what will be the “right” technology be, in an unpredictable future?
Detecting, preventing and deterring market abuse can only be effective when it permeates financial services activities from pre-trade to settlement. The number of different places that trading activity occurs is constantly increasing. Trading can be done at the office, or via cell phone. Or a trader can begin to work a deal at the office, go for lunch and finish it via instant messaging with his broker.
Surveillance is necessary in order to provide transparency in trading activity, whether it is via formal trading platforms, using an instant messenger platform, e-mails, Twitter or other social media sites, or even old-fashioned phone conversations. Compliance officers need to have full visibility in order to spot and prevent abusive trading activity - and that vision has to encompass it all; every message, every trade, every conversation, every Tweet has to be recorded, taped and downloaded into a database for on-the-spot or future scrutiny.
The technology of yesterday will not be able to cope with the audit trail of today. Plus those audit trails need to occur in real-time, not just looking back over history. This means that current methods, employing historical analysis of already-old data just won't do. Analysis has to be done both in real-time and historically in order to make sense. It has to span asset classes including cash equities, interest rates, swaps, commodities, OTC derivatives - cleared or not. Silos can no longer exist in terms of monitoring; trading today is truly democratic, crossing borders, asset classes and currencies.
New market abuses seemingly proliferate by the day. Some are really the old ones - only done faster (like front running), but there are fresh ones too. Just last week the SEC suspended trading in 17 OTC microcap stocks because of doubts over the publicly available information on the companies. Here, investigators from different offices and working groups used “a coordinated, proactive approach to detecting and deterring fraud.”
Packaged applications cannot handle new rules or monitor new types of market abuses. Add flash crashes, mini flash crashes, cross-asset crashes (we call these "splash crashes") to the mix and a picture starts to reveal itself. In this picture there are Chief Compliance and Technology Officers handing the regulatory conductors their tickets to prove that they have the right technology, and then getting kicked off the train because they have the wrong tickets.
Flexible, extensible surveillance and monitoring technology is the top-up fare needed to stay on the train. If you can see every move your traders make today, you can take control. If you can see every move your traders make down the line, you will stay in control. A real-time platform that can handle the massive, increasing volumes of transactions and events in today's electronic marketplaces, and handle the rules of tomorrow’s, is imperative to staying on top of rapidly changing regulations.