The MAS/SGX Trade Surveillance Practice Guide
When it comes to technology, innovation almost always outpaces rules and regulations. Consider the case of automobiles in the United States. From a base of hundreds produced per year in 1900, nearly 500,000 new cars were manufactured in 1914. Not coincidentally, that was the year that the very first electric stoplight was installed in Cleveland, Ohio (1). Clearly, the surge in the number of automobiles changed the dynamic on the roads and new forms of regulation were needed to control the situation.
A similar case can be made for the rise of electronic trading in financial markets and the increasing need for trade surveillance. The advent of fully-automated, electronic trading has ushered in an era of surging volume and innovative products but technology quickly outpaced the existing regulations for market behavior. While forms of manipulation such as front-running have long existed, new forms such as spoofing or ramping have emerged and, with them, new regulations have been created to deal with these developments. An excellent case in point are the new trade surveillance guidelines that were recently published by the Monetary Authority of Singapore (MAS) and the Singapore Exchange Limited (SGX). These new guidelines are a prime example of rules guidance that matches emerging technology and illustrate how regulations evolve to meet new realities.
Surveillance Leadership from MAS
The MAS has a long history of providing written guidance that addresses the objectives, functions and principles of MAS’ financial supervision mandate. In this latest release, the MAS has upped their game as they dive deeper into critical areas of surveillance in an informative and easy-to-use format. The MAS has taken a hands-on approach to provide both form and substance to help guide firms as they strive to comply.
The guide is organized into two sections: the first delineates five guiding principles for trade surveillance operations and the second delves into seven specific types of potential market misconduct and delineates both “good practices observed” and “factors to consider during assessment” for each of the areas listed.
Guiding Principles for Trade Surveillance
The guiding principles section details key findings for each principle as well as both positive and negative industry practices observed along with a list of self-assessment questions that act as a template for evaluating the effectiveness of current state policies.
For example, with Principle #2 (Sound detection mechanisms and assessment framework), the MAS begins by describing the fundamental tenets that brokers should follow, e.g. have policies and procedures that are “clearly documented” to “ensure consistency and clarity”. Next, they go into detail describing best practices observed in their research as well as negative behaviors to avoid. For example, one of the best practices is the use of “automated trade surveillance systems” while an example of negative practices is generating exceptions by “manually filtering trading data.” Finally, and perhaps most importantly, the MAS sets out a series for “self assessment questions” that layout the very questions that regulators will be asking of market participants in the event of a review or investigation. This level of detail and clarity is virtually unheard of from market regulators and closely matches the approach that Eventus Systems takes to implementing a comprehensive trade surveillance regime.
Monitoring of Potential Market Misconduct
The MAS Guide really shines when it comes to describing seven specific types of potential market misconduct. The regulator provides a level of detail regarding these behaviors that is unusual for its depth and goes even further by offering useful guidance by describing the types of activities and questions that can be raised when addressing these important issues. Specifically, the MAS guide provides both a list of “good practices observed” and, perhaps most importantly, a list of “factors to consider during assessment”. These factors go into some detail and are extremely useful as guides to conducting self assessment and internal investigations.
Using the case of wash trading as an example, the guide stresses best practices that range from “daily review of alerts triggered” to “perform trend analysis”. The self-assessment suggestions range from considering that the time of entry between washed trades will vary based upon how liquid or illiquid the security is to the observation that traders at a proprietary trading firm that trade in the same account may not necessarily be engaging in wash trading because they have independent trading strategies.
Leading the Way on Trade Surveillance
Because regulators are generally a step behind new technology, it is important that they take a comprehensive and robust approach to markets that emphasizes principles over rules but provides sufficient detail so as to be helpful to market participants. On these counts, the MAS / SGX Trade Surveillance Practice Guide does an excellent job. While the guide is by no means comprehensive, a fact that the authors are keen to point out, it is a step forward in illuminating the complex issues that surround trade surveillance. Just as the realm of auto safety has come a long way since the first traffic light was introduced 105 years ago, trade surveillance has evolved quickly but there is always more to do. The MAS / SGX effort in this regard is an important step in the right direction.
For Further Reading: from the Eventus Wire blog – “Enforcement Trends at the CFTC”
Eventus Systems, Inc. offers one of the leading global trade surveillance and market risk platforms. Available as a cloud-based or real-time enterprise on-premise solution, the Validus platform provides sophisticated market surveillance and financial risk capabilities, enabling clients to solve some of the most pressing regulatory challenges. For more information, contact us at info@eventussytems.com.