Demand for market surveillance systems is enjoying a strong growth trajectory, with regulatory pressures over current and expanded asset classes causing firms to compete to offer ‘package services’ catering to companies’ trading interests as the market evolves toward the requirement for greater oversight governing market surveillance.
This rise in full scope or ‘package’ offerings makes sense to Stefan Hendrickx, founder and executive director of surveillance and analytics firm, Ancoa. “To be effective, firms need to utilise a market surveillance system that is offered as a single service which firms can use across their trading systems, asset classes and interests.
“It is not user-friendly in the modern trading landscape to use multiple services, it just doesn’t work. A consolidated system allows companies to quickly take a view and act upon it,” he added.
But the growing complexity in the space, while a challenge for tech firms such as Ancoa, Nasdaq Smarts and Bats Global Markets, also presents an opportunity for these businesses.
“More flexibility is required in order to deal with the increasingly complex instruments that are now being traded. This is driving growth; we are seeing a lot of firms with unstructured data or analytics backgrounds that are working to revamp their approaches, often because their historic vendors may not be meeting changing regulatory requirements as quickly as they’d like, and this is helping to boost competition across the space,” said Ancoa’s Hendrickx.
Speaking to FOW earlier in August Michael O’Brien, head ofproduct management at Nasdaq’s Smarts Trade Surveillance, told FOW, “Change is coming; the regulatory expectation is that all firms need to have in place some form of systematic trade monitoring… delivering a surveillance module that meets the risk and cost requirements of the smaller firms.”
Surveillance over the modern trading landscape is a key focus for exchanges, tech firms, brokers and traders, alike.
At the end of July equities exchange group, Bats Global Markets filed its ‘Client Suspension Rule’ with the US Securities and Exchange Commission (SEC), which would enable it to take swifter action to prohibit manipulative behaviour across its exchanges, such as layering and spoofing - the practice of placing an order with the intent of cancelling it before it can be completed.
The terms 'layering’ and 'spoofing’ were brought into the public domain earlier this year, when British futures trader Navinder Sarao was arrested at the order of US authorities over allegations of market manipulation linked to the 'Flash Crash’ in May 2010.
"Pending SEC approval, the Bats Client Suspension Rule would allow Bats to stop ongoing manipulative conduct in a matter of weeks, instead of the lengthier, longstanding regulatory process that can take several years to reach a final resolution," said the firm in a statement.
The group said that such behaviour – under the current disciplinary process - can take an "unacceptable amount of time to stop."
The exchange group’s proposal has sparked debate, (check out the recent FOW Analysis piece here: http://www.fow.com/3476923/Extra-powers-to-curb-abuse-need-work.html) with Ancoa’s Hendrickx suggesting that there is now greater market acceptance that solid surveillance technology is a requirement, rather than a ‘nice to have.’
“This is why a market package – which ties together contextual surveillance and analytics as well as data – works so well. Normalising data is a big challenge, with items such as electronic communications becoming increasingly important and a modern requirement is that surveillance tech can review this.”
Ancoa offers market surveillance for derivatives. The firm’s system includes surveillance across trading data, using a bespoke alert system, but also non-standardised data such as emails and instant messaging; as seen in the FX space, coverage of modern communication tools have the potential to identify and prevent large scale abuse.
The market for trading surveillance technology is certainly competitive, with new regulatory changes a driver in growing adoption.
There has been an evolution of asset coverage by market surveillance technology, and growth remains on the horizon, with the over-the-counter (OTC) space over recent years become integral to Nasdaq’s Smarts business.
Indicative of the changing market requirements, as reported by FOW, Nasdaq’s Smarts has just signed up the latest exchange clients for its market surveillance technology, set to go live by the end of the year, as companies continue to ramp up compliance and monitoring functionality ahead of impending regulatory changes.
Speaking to FOW earlier this month, Nasdaq Smarts’ O’Brien said, “we have seen the OTC space go from a market segment that was seen as exotic and outside the realms of systematic monitoring, to a space that is one of our fastest growing areas with our Fixed Income and FX surveillance modules having been deployed by a significant number of the large dealers in these markets. There remains a whole potential space to tap in OTC derivatives.”
What does regulatory reform mean for how you do business? Find out at FOW's Regulation 2015 event in London on 8 September, sign up now: http://bit.ly/Regulation2015