Originally published on MarketsMedia
Trade surveillance professionals face a “crazy” daily challenge of keeping up with the speed, complexity and breadth of financial markets, given chronic resource constraints, limited intra-firm influence and power, and numerous other challenges.
But there are reasons for optimism, such as increasingly tried-and-tested solutions, plus more awareness toward having surveillance seen as an integral part of a firm’s trading flow, rather than a separate, siloed department.
Those were key takeaways of The Future of Trade Surveillance, a new report published by 1LoD, a provider of intelligence to risk and control professionals, and commissioned by Eventus, a provider of trade surveillance, algo monitoring, market risk and transaction monitoring solutions.
As one surveillance leader at a global institution told 1LoD: “What we’re trying to do is crazy! We’re trying to run a surveillance system with similar complexities to the associated trading systems, but for a hundredth of their budget, to detect extremely rare events and behaviours, some of which we do not know exist, in a process that generates almost 100% noise.”
Firms said surveillance methods have somewhat stagnated over the past five to 10 years and the function is due for disruption, but there is a reluctance to turn off legacy systems because they at least allow firms to keep up with other firms that use the same systems. Emerging technologies such as generative artificial intelligence have potential for tomorrow, but they aren’t solving surveillance problems today.
In a keynote address at 1LoD’s XLoD Global conference in London last month, Joe Schifano, Global Head of Regulatory Affairs at Eventus, noted that regulators on both sides of the Atlantic have signaled that market participants just standing still on surveillance isn’t good enough.
Joe Schifano, Eventus
“Whether it’s the outcomes-based methodology of the FCA, or the enforcement regime in the US, there are clear signs that regulators are honing their surveillance tools to supervise market participants,” Schifano said.
”’Being in the pack’ or ‘using the same functionality as everyone else’ is no longer really something you can rely on,” Schifano continued. “Whether you are building an in-house solution or supplementing with vendors, true flexibility, interoperability and scalability are now required capabilities – and you must focus on your risk assessment.”
The 1LoD report highlighted a half-dozen specific compliance issues that firms face, and possible solutions for each. For example, surveillance budgets potentially can be increased when juxtaposed with the amount of monetary fines levied by regulators; a lack of empowerment can be addressed by top management instilling a compliance culture; data gaps can be filled as newer surveillance technologies force the issue; and the prevalence of false positives can be mitigated by a holistic trade surveillance system.
Ultimately, surveillance pros said baking surveillance into the trade lifecycle, akin to how post-trade processes are, is critical. “Trade surveillance needs to be treated like some of the other core downstream systems,” one surveillance leader told 1LoD.
Schifano offered a tech-forward, but nuanced view of the future. “Moving forward, AI and other novel technologies may well transform banks’ risk and control functions,” he said in the conference keynote. “But … this does not come without cost. In the world of compliance today, with multiple challenges and stress points for compliance leaders, innovation will be deliberate, thoughtful, and cannot run afoul of the ultimate goal of our work in this space – the mitigation of regulatory risk.”