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New data sources and trade surveillance technology have become the primary impetus of change according to most respondents in Nasdaq’s 2022 Global Compliance Survey (GCS).
Two-thirds of GCS participants in last year’s survey said the shift to working from home due to the pandemic was driving transformation in compliance practices.
The change this year reflects the growing importance of global external factors, for example, the need to monitor emerging products such as digital assets; growth in trading venues; a shift in over-the-counter products being traded in electronic markets; and increasing focus on analytics, behavioral science, and machine intelligence to complement existing detection systems. The monitoring of new investment strategies, products, and asset classes requires compliance teams to gather and normalize data from more sources to create a ‘single source of truth’.
Almost two thirds, 65%, of GCS respondents said the increased regulatory focus on market manipulation, such as spoofing, layering, and front-running represents the greatest risk for trade surveillance teams. The majority, 55%, also said processing and analyzing data in a more intelligent manner is the most important requirement to mitigate this risk. This has pushed investment in technology and increased demand for access to data via APIs and for analytics that provide insight into data.
For example, cloud investment has moved from 0% just three years ago to becoming a significant area of investment in surveillance. Coverage of electronic communications has also grown strongly to identify market abuse and as more retail investors entered the market.
In contrast, there was a decrease in investment in artificial intelligence capabilities during the last three years which may indicate that firms are becoming more selective in applying AI as understanding of where it can add value has evolved. However nearly half, 48%, of respondents said they will renew investment in AI over the next 12 months.
More than 42% of respondents also believe investment in surveillance systems will continue to increase in 2022 with a focus on improving data quality, enhancing analytics, and monitoring of digital assets.
Over the next 12 months, cost scalability – the increasing scope of products and data that need to be monitored by firms – and reduction of false positives will be the greatest challenges according to half of respondents. The survey said: “These themes align directly with reducing the total cost of ownership by using more integrated technology, further reliance on third-party expertise, and exploring managed service models.”
The need to reduce false positives links to cost scalability but also highlights the need to apply improved analytics across a broader range of compliance data to generate relevant alerts, including from electronic communications and social media. The integration of insights and data signals from across compliance channels could also materially improve detection of market abuse and financial crime.
The survey also found that three quarters, 77%, of firms maintain distinct reputational risk management policies and resources, up from 63% in 2019. Reputational risk management has always been a top concern and 80% of GCS participants assert their employers promote a firm-wide culture of proactive compliance. Firms can protect and prevent reputational damage associated with market manipulation by efficiently monitoring anomalous trading patterns while streamlining processes.
The latest GCS survey was carried out in October 2021 and includes responses from more than 150 experienced compliance professionals from predominantly sell-side firms, but with healthy representation from the buy-side retail banks or corporate entities and market infrastructure providers. Nearly half, 45%, of respondents had more than 10 years of compliance role experience and 59% hold a C-level, VP-level, or director position. Nasdaq has been gathering views annually since 2015 so the survey uniquely provides comprehensive tracking of compliance trends over a period of significant regulatory, economic, and social change.
