Global expenditure on trader surveillance is set to reach US$758m by the end of this year, as financial institutions (FI) allocate increasing resources to detect and prevent market abuse according to new research published today by Chartis Research and EY, The Future of Trader Surveillance.
This increase in spending marks a 5% increase on last year, with 71% of respondents reporting to be in the process of upgrading their current trader surveillance systems. One of the key objectives of financial institutions’ investment is to reduce false positives – a major challenge in trader surveillance. Notably, having the budget to improve their systems does not appear to be an issue for respondents: only 5% named budget availability as their biggest challenge.
The research finds FIs prioritizing the implementation of advanced technology to avoid a repeat of high-profile and costly events such as the LIBOR and foreign exchange (FX) trading scandals, as well as those connected with the manipulation of ISDAFIX earlier this year.
Key drivers of change identified in the research include:
- Regulators want more detailed contextual information around trades. Rules such as the Market Abuse Regulation (MAR) require FIs to gather this contextual information. This in turn is driving a more holistic approach to surveillance, bringing together electronic communications (e-comms) and trade monitoring.
- FIs need fewer and better alerts. Trader surveillance systems generate thousands of alerts per day, and to keep pace FIs are expanding their compliance departments with additional full-time employees, forcing up costs.
- Regulations are pushing FIs to expand their surveillance into more asset classes and new trading venues. Fixed-income, commodities and other over-the-counter (OTC) products must be catered for, along with organized trading facilities (OTFs) and other emerging venues. Systems originally designed for more traditional, “regulated” asset classes (such as equities) are struggling under the weight of more trades, idiosyncratic reporting requirements and a huge volume, variety and velocity of data.
Glenn Perachio, Financial Crime Market Abuse and Trader Surveillance Solution Leader, Ernst & Young LLP, says:
“The research suggests that the default position for FIs has been to use systems designed primarily to meet the requirements of regulators. As a result, FIs have lost an opportunity by making only modest technical advancements within this space, wary of distinguishing themselves from their peers. Despite the increased investment, just 7% of firms surveyed have introduced complete surveillance across all asset classes and geographies. Furthermore, about half of financial institutions could be missing out on vital surveillance insights by failing to monitor e-comms as well as trades and orders.”
The research found that while regulations allow for a certain degree of flexibility when addressing trader surveillance, FIs tend to invest to keep pace with asset class expansion and regulatory change, not innovation, resulting in only modest technical advancements within this space.
Michael Patterson, Partner, Ernst & Young LLP, FSO, says:
“Traditional solutions to combat market abuse may no longer be sustainable for some institutions. FIs understand the need to improve trader surveillance and are allocating increasing resources to do so. Moving forward, the key will be to ensure that these resources are used correctly to reduce costs and enhance efficiency by applying smart technologies including automation and AI, rather than simply adding more full-time employees.”