Financial market abuse and rate rigging scandals have not only resulted in unprecedented fines, they have prompted calls for more robust action to counter fraud in the Capital Markets. As the market prepares for MiFID II in early 2018 a new urgency towards improved risk management and market surveillance has begun.
Alerts, monitoring and reporting market abuse
The most advanced market surveillance solutions have the capability to alert, monitor and report suspicious trading activity. Such automated systems can alert compliance officers early on, by identifying suspicious situations and relevant information based on a number of pre-defined scenarios. Such scenarios may include: naked short selling; high volumes; and phantom orders amongst many others. Alerts should be displayed over long periods of time, highlighting trends and assisting in the recognition of complex market abuse patterns. Other functionality should include the ability to:
- Rigorously track the status of alerts
- Ensure proper follow-up when suspicious activity is identified
- Escalate events as appropriate to senior management and the regulators
- Attach and archiving documents for use as evidence
- Append comments regarding suspicious activity
Monitoring of potential market abuse should be possible across all trading venues and asset classes. Systems should also automatically check trading activity against other trades, reference market data, instrument data, employee data and other relevant information.
Reporting is also an important element and some systems will include a library of standard reports. This makes it easy for compliance officers and risk managers to provide information and communicate with management, auditors and regulatory authorities.
The ability to review and analyse situations that may potentially involve market manipulation, is also an important function of surveillance solutions. Many will offer a number of different views to help compliance officers and risk managers to understand trends and concentrations of suspicious activity as they unfold, including:
- Alerts by product class or instrument
- Alerts by trading system
- Alerts by trading location or trader
- Alerts by trading venue
The importance of intuitive systems
As part of best working practice, intuitive functionality should be built into market surveillance systems to allow even non-expert operators to drill down quickly from alerts to specific transactions. Analysis and trend recognition can be made easier via easy to understand intuitive graphical user interfaces, which make it easy for compliance officers to react quickly to abuse alerts. Such intuitive functionality and presentation can make it much simpler for users to spot a small irregularity, thereby preventing it from becoming a major catastrophe.
Common scenarios covered by market surveillance software
Constant change is a characteristic of markets. In much the same way as anti-virus software must evolve constantly to identify new forms of fraudulent and malicious software attacks, market monitoring software must also evolve continuously based on known and emerging forms of market manipulation. The most successful surveillance software vendors examine the market for any new scenarios of market abuse and respond by updating their solutions to account for this change.
Modular and scalable systems
Modular monitoring systems can be particularly effective in accommodating change. Modular architectures allow updates and enhancements to be made via the addition of a new module. Their architectures allow for new functionality to be added as required or as it becomes available. Such systems are capable of monitoring multiple and limitless scenarios that may be fraudulent, from a single user interface. Market surveillance specialist b-next for example has created a modular and scalable system CMC:Suite, which currently manages more than 80 scenarios associated with potential fraud.