Compliance officers at financial firms face a multitude of challenges in implementing and maintaining an effective trade surveillance regime, notably including inadequate technology and a shortage of skilled staff.
That was a high-level take-away from the 2023 Trade Surveillance Market Review, published by Acuiti and commissioned by Eventus.
Will Mitting, Founder and Managing Director at Acuiti, and Joe Schifano, Global Head of Regulatory Affairs at Eventus, delved into the report on the GlobalTrading Podcast. (GlobalTrading is a Markets Media Group publication.)
Mitting set the stage with a thumbnail assessment of the landscape in 2022, when the inaugural report was published.
“Last year we found that the complexity of trade surveillance had increased considerably over the prior three years, which was driven by increased regulatory requirements and market volatility,” Mitting said on the podcast. “We found a sector that relied heavily on manual processes to investigate and close alerts, but also one that was planning to invest in order to automate processes and reduce inefficiencies.”
One key finding from the report was that as the number of alerts continues to rise with more manipulative behavior and market disruptions, so does the incidence of false positives – indicating that market participants’ surveillance technology and infrastructure has not kept pace with changing market conditions.
Schifano noted that more than half of trade surveillance and compliance executives reported that more than half of their alerts were low quality, draining time from already time-strapped teams. “It is quite surprising that in this day and age, with today’s technological capability, that’s still the experience people are having,” Schifano said. “That stands out to me from this survey.”
Amid a tight market for talented technologists – where Wall Street firms need to compete not only with each other, but also other industries – it’s no surprise that surveillance roles are hard to fill. Indeed, more than 40% of Acuiti survey respondents said finding skilled staff is a “critical challenge,” the most of seven challenges.
“It begs the questions – how does that impact your day-to-day operations, and where does that cause a problem?” Schifano said. “The need to find skilled staff puts pressure on any kind of in-house build, and it also puts pressure on any use of a legacy system that requires a lot of manual intervention.”
Schifano continued: “To me, this is a clear indication that automation, innovation, visualization, and more and better technical support for compliance and surveillance folks are critical needs.”
Order book manipulation was highlighted as a problem, with 32% survey respondents reporting it’s the area with the most false positives; 39% saying it’s the alert that takes the most time to investigate; and 41% saying it’s the most difficult-to-detect market abuse. That ties in with industry themes of expanding business models, trading across more markets, and increasing data requirements.
“For the larger investment banks that operate in multiple jurisdictions, one benefit of investment in trade surveillance software is that you can do more in terms of investigations and queries,” said Mitting. “This obviously reduces regulatory risk, but it also increases the workload for firms that are not simultaneously investing in better automation of the investigative process itself. So I expect to see firms also looking at how they can automate further over the next 12 months.”
Survey respondents cited flexibility to customize as the most challenging feature of trade surveillance software; getting this right can go a long way toward addressing the key challenges faced by trade surveillance pros.
“The way to deal with the increase in false positives, and the difficulties with various types of manipulation, is with technology,” Schifano said. ”This is where the ability to customize becomes really critical.”
The Future
Mitting spun the discussion forward. “The problems we’ve identified in this report and the previous one aren’t going away anytime soon,” he said. “Markets are going to increase in complexity, venues are going to proliferate.”
Amid the increasing technology needs of surveillance departments, there are signs of a broader retrenchment in Wall Street tech spending, and Mitting noted that a potentially less volatile market could reduce firms’ pressure to automate. “It will be interesting to see next year whether people are following up on their plans to invest and if so, what impact that’s having on the overall efficiency of the market.”
As this is the second year of the Acuiti/Eventus Trader Surveillance Market Review, Schifano and Mitting further discussed the future of the Trade Surveillance Market Review with GlobalTrading, following the podcast.
Mitting said: “We want to follow trends over time, so we will continue to ask the fundamental questions.” Schifano added: “Next year we might query participants more about some of the current trends and challenges being discussed at the moment, such as the need for cross-product surveillance and use cases for artificial intelligence.”
