Defining the scope of a 21st century market surveillance system is still elusive for regulators and traders alike, even as the shape of things to come emerges from the wreckage of the financial crisis. Not only are firms grappling with the technological demands of seeking alpha in an increasingly fast, data-driven game, so too regulators are harnessing tools to maintain orderly markets. Anna Reitman reports.
Market surveillance has come a long way since spreadsheets were used to programme trading. In 2010, Mondo Visione, a publishing hub for information about exchanges and trading, began running surveillance seminars in London. At that time, how to monitor the super speed of high frequency trading was only just entering the debate.
"Trading has been going faster for as long as I can remember," said Herbie Skeete, Mondo Visione's managing director. "HFT is just using trading technology, it doesn't matter whether you are on a trading floor or using a machine, you have to obey the rules."
For regulators, it's a question of the kinds of systems necessary to keep up, but also about developing them with intelligence to cope with the dynamic nature of rules.
"The way people do things can change all the time, so you have to have systems that are flexible, and self-learning," he added.
Skeete's experience with developing these exact kind of systems began at Reuters in the early 90s, when he pushed to design a user-driven approach to the company's surveillance engine. He also realised that the same systems being used to detect other kinds of fraud, credit for example, could be used in financial market surveillance as well.
"Before, it was people like retired policemen looking for illegal trading patterns. Now there are more and more sophisticated trading systems. The problem is looking across markets and the sheer amount of data you need to look at to see if there is anything odd going on."
In terms of technological innovations in the space, Skeete points to Software AG's use of complex event processing. Speaking at the Spring Surveillance Seminar, Theo Hildyard, product marketing manager at Software AG, said that CEP is "extremely good at taking streams of data, detecting patterns within that data and acting upon them. In order to conduct effective market surveillance, a system needs to be able to do exactly that and perform at extreme scale as well as work with historical data and real-time data."
Budgets and bureaucracy
The problem is not, however, technology itself, explained Skeete, rather the realities of political and financial constraints. "It is not that difficult to build an effective surveillance system that can look at vast quantities of data, look across asset classes, markets…but it costs a lot of money to do it."
Little wonder then that IT budgets for regulators have been increasing. For 2015, the Securities and Exchange Commission put in a request for $177 million for the Office of Information Technology, up $14.5 million from 2014 to "support a number of key IT initiatives, including enhancements to the system for receiving (tips, complaints and referrals), improvements to IT security, and infrastructure upgrades to achieve efficiencies in business operations and reduce long-term costs".
In its budget request, the Commodity Futures Trading Commission said that "the surveillance mission activity is by far the most technology intensive of all of the regulatory activities" representing 19 percent of the total requested resources, or $53.5 million, including $20 million in information technology.
The UK's Financial Conduct Authority increased its Information Systems budget request to £88.2 million ($147.2mn) for 2014/15, up just over 15%. The European Securities Markets Authority IT work programme for 2014 is budgeted at €7.38 million ($9.9mn), up 34% from 2013.
Martha Winata, product manager at Cinnober, said that the problem is more about the many different jurisdictions, authorities with overlapping or unclear spheres of control, and myriad of rules that apply.
For example, tracking a suspicious trade from regulator to exchange to firm, even within the same jurisdiction, requires information sharing, which Winata does not see as being particularly effective in the current landscape.