As we get past Labor Day, a few things begin to occur: the days get noticeably shorter, leaves start to change color, and industry conferences pop up like mushrooms. Most of these are general in nature, covering a wide variety of topics in scant detail, but the recent Surveillance Summit from 1LoD took a deep dive into the most critical issues facing trading surveillance and produced valuable insight into both where we are and where we’re going as the trading industry faces ever increasing regulatory scrutiny.
Important Surveillance Trends and Topics
The Summit reinforced the fact that the world of trade surveillance and compliance continues to grow both in terms of importance and complexity. Several key takeaways from the event include:
- The trend towards more regulation in marketplaces continues unabated, with areas like fixed income, FX and cryptocurrencies facing pressure to adopt practices that are more in line with traditional asset classes such as equities, options, and futures.
- Data quality is a huge piece of the puzzle and is often overlooked. The best technology in the world with committed resources aren’t of much use if the data that underpins a surveillance program is not top-notch.
- There are some very real disconnects between systems for first line of defense (front line trading and risk) and second line of defense (traditional compliance/governance). It pays to ask probing questions to make sure that there is optimal operational alignment between these two functions.
- Increased workload from false positives is a major concern, making pattern recognition and trader profiling more and more important. Effective use of these tools makes it possible to spend less time on triage of false positives and more time on investigating serious alerts. One of the true costs of surveillance is time spent investigating spurious alerts.
- Multiple approaches to alert generation and resolution are the best approach. Casting a wide net at the outset and then using automation, including machine learning, to help identify the most actionable candidates for investigation is best practice .
- Intelligent automation is one of the keys to addressing both cost and complexity in conducting surveillance tasks. Firms that are not embracing automation, including machine learning (ML), are not helping themselves. That being said, many, if not most, ML efforts are nascent at best, making this area one that requires extra effort and investment.
The future of trading surveillance
The task of trading surveillance has never been easy and the way forward points to ever increasing demands and complexity that need to be addressed. 1LoD has done an excellent job of shining a light on these important areas and their continued efforts in this regard will serve the industry and the trading community well going forward. The job isn’t going to get any easier but a focused and informed approach to dealing with these important issues will make the task at least a little bit less trying.
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.