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Trade surveillance and market abuse: COVID, costs and compliance

Stefan Queck
Stefan Queck
Business Development Director, b-next Holding AG

A new Refinitiv webinar sees a panel of experts explore the issues surrounding the rise of market abuse and the challenges of monitoring trade surveillance since COVID-19 changed the work environment.

  1. Last year, the potential for market abuse in fund management firms accelerated globally after staff first began to work from home.
  2. Figures suggest that just under 6 percent of suspicious transactions set off alerts among investors.
  3. Headline news stories about the rise of market abuse and the challenges of monitoring trade surveillance since COVID-19 continue to make compliance teams nervous as they try to navigate new dynamics and rising compliance costs.

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The global shift to home-working precipitated by the COVID-19 pandemic has increased the potential for market abuse in fund management. Only around 6 percent of suspicious transactions triggered alerts among investors.

Compliance teams were forced to navigate new dynamics and rising costs as remote working made abuse in this area harder to monitor and detect.

The webinar explores some of the headline case studies seen in the news, including the challenges compliance teams are facing and solutions that can help. Firms are in need of data they can trust, powering a fully integrated platform that makes compliance feel like an asset to business, rather than another cost.

Listen to the webinar – Trade surveillance and market abuse: COVID, costs, and compliance

The panelists consider how innovative technology (AI, machine learning, data analytics) and reliable data are helping regulated institutions manage their compliance costs, needs and future direction.

Existing inefficiencies in trade surveillance practices have been exacerbated in the pandemic environment, highlighting the need for fully integrated and automated systems.

Refinitiv serves the compliance industry with our partners, such as b-next AG, one of the world’s leading providers of corporate software in the capital markets trading surveillance and compliance sector.

The challenge of trade surveillance and market abuse

The extraordinary increase in remote working since the COVID-19 pandemic took hold in March 2020 has changed the way financial firms and regulators look at trade surveillance and market abuse.

According to a Thomson Reuters report, more than 71 percent of firms are upgrading their trader surveillance system. Firms are also facing cost increases; global expenditure on trader surveillance is increasing by an average of $10,000 per employee.

On the regulatory side, the Market Abuse Regulation (MAR) came into effect in 2016 and it continues to apply despite Brexit. MAR penalises insider trading, market manipulation and unlawful disclosure of information, and the Financial Conduct Authority (FCA) may supervise and sanction individuals.

The challenge is whether the MAR framework is appropriate, given how the work environment has changed due to the pandemic. Sensitive information has been shared through unmonitored and/or unencrypted communication, using such apps as WhatsApp.

The FCA reminded firms that they still have an obligation to record communications, including electronic communications. Another challenge is the blurring of personal and work lives, which the pandemic has further accelerated.

Outsourcing versus in-house compliance skills and cost

Since March 2020, according to one report, 30 percent of firms are considering outsourcing some or part of compliance functionality, citing a lack of in-house compliance skills and cost.

Firms that are building in-house capabilities are searching for talent with maths and product skills. However, it’s difficult to find both in one person. Many firms are combining outsourcing with in-house talent for a holistic approach.

The main driver in the market is the cost of applying sufficient surveillance techniques company-wide. Asset classes need to be covered, plus locations, jurisdictions and new regulations as regulators expand their coverage.

The need for data analytics

Firms need data analytics for compliance, which could be considered as belonging to two main areas: digital infrastructure and digital regulatory response.

Under infrastructure, automation helps to reduce operational cost. The more processes are automated, the more the contribution to improved margins. Scalable cloud solutions are important; if data volume increases, this can be managed immediately and the costs associated with cloud solutions are flexible.

For the digital regulatory response, what’s needed is a flexible way to integrate data. A flexible solution would be covered on the same platform rather than a silo, so there is no need to run multiple systems. Firms can run more data, with the ability to configure independently based on jurisdictional requirements.

The key is having reliable data. During the webinar, a polling question was posed to the participants: “What do you see as the main challenges of monitoring trade surveillance?”

Access to reliable data was chosen by 66 percent, with automation chosen by 32 percent and sourcing of competent risk profiles, 14 percent.

Innovative technology and reliable data

The cost of maintaining compliance can be staggering. Global banks and large brokers that have upwards of 20,000 employees could end up spending $200 million in compliance every year.

Regulatory change was reported as the top compliance challenge for 2020. In 2019, there were 56,624 regulatory alerts from more than 1,000 regulatory bodies, averaging 217 updates per day.

However, UK regulatory authorities are in a “listening and learning” mode concerning the use of artificial intelligence. For instance, the FCA has partnered with the Alan Turing Institute to study the impact of AI on financial markets.

A key question: how can we train machine learning better to inform humans to detect behavioural signals when liquidity was an issue? It can’t be a ‘tick-the-box’ exercise. Advanced technology must be engaged in the right tasks to better understand, identify and mitigate risk.

Although many agree that automation is the way to go, it is also about building the right infrastructure, and the right machine to deal with as many trades on an automated basis.

Market participants see an accelerated use of AI, but it is only as good as the data available and for some asset classes that is a challenge and requires a specific type of competency to understand it.

High profile cases in the news

Financial markets are seeing increased retail investor involvement. In 2020, there was an increase in opening of brokerage accounts and reactivation of dormant accounts.

The concern is that social media and new forms of communication become a large driver in investment decisions, with potentially vulnerable investors at risk. Regulators are looking closely at such high-profile investing stories as GameStop and AMC, where irrationality entered the market.

Regulators have three options – first, engage in investor warnings; second, a more interventionist approach, i.e., ban products or intervene; or third, enforcement action.

A polling question during the webinar asked: “Has your firm experienced an increase in suspicious transaction and order reports since March 2020?” Of the respondents, 68 percent said ‘No’, while 31 percent replied ‘Yes’.

However, the question was also asked: “Has your compliance budget increased from 2019 to 2021?” To this question, 73 percent replied ‘Yes’ and 26 percent said ‘No’.

Adapting to changes and new risks

With b-next’s intelligent compliance platform and seamlessly integrated Refinitiv data, companies are able to adapt to changes and new risks, shielding them from major financial damage and penalties from regulatory authorities.

Powered by a partnership between b-next and Refinitiv, CMC:eSuite addresses these challenges cost effectively, with a proven, highly accurate approach to detecting potential attempts at market manipulation.

The integrated platform incorporates behavioural analytics, machine learning and artificial intelligence, providing a holistic approach to trade surveillance and compliance needs.

b-next offers interested companies the opportunity to get to know the software in individual demo sessions. Learn more about b-next solutions and services.

Listen to the webinar – Trade surveillance and market abuse: COVID, costs, and compliance