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The Changing Face of Trade Surveillance and the Role of Analytics

Regulators across the world are resorting to the two-pronged strategy of deterrence and detection to make securities markets a safer place to invest and to retain investor confidence. They are collaborating with each other and sharing their experiences to equip their surveillance systems with advanced detection techniques. They are also implementing stringent regulatory provisions with massive penalties for violations to curb market abuse.

Over the last few decades, capital markets across the world have seen tremendous growth in various market activity parameters. These parameters include trade volumes (both traded quantity and number of trades), cross-border settlements, advanced derivatives products, new trading strategies and venues. This has increased the complexity of monitoring these transactions across jurisdictions, safeguarding the interest of common investors who are often on the receiving end of market abuse by the large players.

Trade surveillance detects any market abuse post facto and also anticipates any potential market abuse by the market participants. It does this through tools, processes and investigative methods that ensure market stability, transparency, security and efficiency. Key trade surveillance activities include analysis of the full depth of the order book, examination of complete audit trails of orders and trades in suspected cases and analysis of cross-market and cross asset-class views of trades entered by the entity under scrutiny. These are consolidated to arrive at conclusive evidence of any suspected market abuse or manipulation.

Surveillance today entails a cross-market and cross-asset class view of trades (or even orders). Several aggregations have to be made to draw the big picture and detect potential violations. Intensive pattern analysis can accurately detect trading malpractices and market abuse. It has emerged as a major subject area for research and is being increasingly used in advanced detection systems. Coupled with other capabilities such as Big Data analytics, it has become the backbone of near real-time and order level surveillance.

This paper highlights some emerging trends in securities market trading and in the surveillance domain. It delves into the role of analytics in capital market surveillance from the regulator’s and SRO’s perspectives and examines the efficacy of surveillance analytics and the new trading techniques deployed by market intermediaries. The author also predicts a few surveillance imperatives that will shape the future of trade surveillance.

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