The implicated firms admitted to the facts outlined in the SEC orders, acknowledging that their conduct breached record-keeping provisions under federal securities laws. Collectively, the firms have agreed to pay $392.75 million in civil penalties and are in the process of implementing measures to enhance their compliance policies. Three firms that voluntarily self-reported their infractions will face significantly reduced penalties.

“As today’s enforcement actions against more than two dozen firms reflect, we remain committed to ensuring compliance with the books and records requirements of the federal securities laws, which are essential to investor protection and well-functioning markets,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “Among this group of firms, there are several that differentiated themselves by self-reporting prior to the staff’s investigation, demonstrating once again the real benefits of proactive cooperation.”

The SEC’s investigations revealed pervasive use of unapproved communication methods, referred to as off-channel communications, across the firms. These off-channel communications included records that should have been preserved under securities laws but were not, impeding the SEC’s ability to conduct effective investigations. The violations were found to involve personnel at various levels, from senior managers to supervisors.

The firms were charged with breaches of record-keeping provisions under the Securities Exchange Act and the Investment Advisers Act, in addition to failures in supervising their personnel to prevent such violations. Alongside financial penalties, the firms were ordered to cease and desist from further breaches and received formal censures.

Reacting to the announcement, Matt Smith, CEO of integrated surveillance solutions provider SteelEye, commented: “The SEC’s recent hefty fines dispel any notion of a softer stance on off-channel communications breaches. Its crackdown remains in full force. The SEC is clearly expanding its focus beyond large tier-one banks, continuing to target investment advisers and broker-dealers. With fines posing a growing threat to firms of all sizes, it’s crucial they invest in the necessary measures, embracing smarter, more efficient approaches to supervision to navigate the evolving regulatory environment more effectively. Only then will they be able to keep pace with the SEC’s unforgiving scrutiny.”

Oliver Blower, CEO of London-based communications surveillance specialist VoxSmart, added: “It has been eerily quiet on the watchdog front of late, particularly when it comes to instant messaging record-keeping penalties. But this barrage of fines offers a stark reminder that the regulator will continue waging its battle on off-channel communications for the foreseeable. While this will alarm US firms ill-equipped to monitor staff use of platforms like WhatsApp, financial institutions operating beyond the SEC’s reach should also pay close attention. Overseas regulators certainly will be, and we expect a domino effect as watchdogs worldwide follow suit.”

The post SEC Charges 26 Financial Firms for Record-Keeping Failures, Resulting in $392.75 Million in Penalties appeared first on A-Team.

TT Trade Surveillance, powered by TT’s proprietary SCORE machine learning algorithm, expands the company’s surveillance capabilities across multiple asset classes, including equities, options, FX, and fixed income. The company plans to start upgrading all users of its existing trade surveillance platforms, TT Score and Compliance Plus, to the new TT Trade Surveillance system, which includes 47 new configurable models to detect manipulative trading activities, in the second half or 2024.

“TT Score, a futures and options surveillance platform based on machine learning, is a product that TT has offered for several years. Last summer we acquired Abel Noser, which also has an equities surveillance platform called Compliance Plus,” says Ted Morgan, Trading Technologies EVP Managing Director, Compliance, in conversation with TradingTech Insight. “Over the past year, we have been combining the best features of these two platforms, addressing any gaps, and developing TT Trade Surveillance, our new platform due to be launched on 1st July, which will offer comprehensive multi-asset class trade surveillance, covering not only equities, futures, and options, but also other instruments such as foreign exchange and fixed income. It will also feature enhanced case management capabilities, extended graphing and charting, and will include all necessary market data for comprehensive surveillance. Assembling that across multiple asset classes has not been a small project, so this is a big step forward for us.”

Included in the new TT Trade Surveillance platform will be front-end functionality that allow users to adjust settings and thresholds that pertain to particular models so that they can be run on any subset of data they want to filter, such as defining parameters differently for specific countries or distinguishing between retail and institutional flow.

TT Futures TCA, the company’s new comprehensive transaction cost analysis tool that also builds on TT’s August 2023 acquisition of Abel Noser, leverages an extensive repository of anonymised, microsecond-level futures market and trade data to provide extensive metrics and measures for detailed post-trade analysis, aiming to fill the gap in TCA tools tailored for futures trading.

“Abel Noser were pioneers in transaction cost analysis (TCA), primarily in the equities markets, but increasingly expanding into FX, futures, and fixed income,” says Peter Weiler, TT’s EVP Managing Director, Data & Analytics, and Abel Noser CEO. “The merger with TT brings significantly enhanced market data. We now have large, anonymised sample sets of trading data that we can compare against that market data. We have also expanded our metrics beyond traditional equities benchmarks like VWAP and implementation shortfall, to include those critical in the futures market, such as quote data, depth of book, sweep orders, and so on. With this integration, we’ve also improved our front end’s functionality with additional analytics, enhanced charting capabilities, and executive summary reports.”

The new TT Futures TCA capability allows users to select from a variety of customisable reports to analyse and enhance their trading strategies while assessing the effectiveness of their trading counterparties. This capability is available now and will be integrated into the TT platform as a front-end widget in early 2025. The customised analytics will be accessible to clients based on their desired metrics, breadth, and level of granularity.

“The front-end widget will display all trade data and measured data in one place, providing comprehensive transaction cost analysis across asset classes, even if you don’t trade exclusively through Trading Technologies,” says Weiler. “This integration will bring together cash equities with options, options on futures, buy/writes, strangles, straddles, and more.”

The post Trading Technologies Unveils Futures TCA and Multi-Asset Trade Surveillance Solutions appeared first on A-Team.

Recent accolades for the company include being named Best Trade Surveillance Solution at A-Team Group’s TradingTech Insight USA Awards 2024, following similar recognition in the Asia-Pacific region at the 2024 RegTech Insight Awards APAC. Eventus has now accumulated six A-Team Group awards over the past five years, including two RegTech Insight Europe Awards.

In this Q&A with TradingTech Insight, Eventus CEO Travis Schwab elaborates on the factors driving the company’s continued growth and success.

TTI: Travis, congratulations on your recent award wins and your new signings. Your client base has now grown by 25% over the past year. Can you elaborate on the factors driving this growth?

TS: It’s a combination of factors, some of which are new and some are ongoing. If I could provide a high-level view, I’ve always said that markets never become less regulated; that’s just the nature of the industry. This creates a consistent tailwind for our business. While we don’t want to see our clients under constant pressure from new regulatory changes, it’s an unavoidable aspect of the industry. Regardless of the asset class or geography, the trend consistently moves towards more regulation.

Specifically, several events have driven our growth over the past year. For instance, we signed up our first South African client because the market structure there has been evolving. The exchange no longer provides surveillance to its clients in the same way it used to, prompting local clients to seek alternative solutions. We’ve seen similar activity in Brazil, where the local regulator has either stopped or is considering stopping the provision of trade surveillance services to its registrants. Consequently, these clients are looking for alternative vendors, driving our growth in these regions.

Additionally, regulatory focus on specific areas where we have historically excelled has also contributed to our growth. For example, the recent substantial fine imposed on JP Morgan for data governance issues has dominated our meetings in recent months. There’s significant concern among clients that their existing systems, whether provided by vendors or developed internally, may not have the necessary internal controls to ensure all data from their activities is captured accurately in their monitoring platforms. We’ve addressed these data integration challenges since the inception of our company. Our systems reconcile market data, trade lifecycle data (such as buys, sells, cancellations, and replacements), and reference data to ensure comprehensive coverage and identify any potential gaps. This approach, surprisingly, wasn’t always standard practice but has become crucial recently.

Moreover, changes in the fixed income market in the United States, which now require certain participants to become broker-dealers, have also generated considerable activity for us. So the continuous drumbeat of regulatory change, market structure issues, and regulatory focus on new areas – along with the continued movement to Eventus and away from inflexible legacy surveillance solution providers – have all been significant drivers of our growth.

TTI: Are there any particular areas of new functionality or enhancements that you’ve rolled out in the last year or so that have been particularly exciting for your client base?

TS: For us, there have been two significant areas of focus. Firstly, we’ve been continuously enhancing our user interface (UI) for about two years now, and we keep pushing the boundaries of what we can achieve. Part of this effort is about consistently improving the UI to enhance the workflow. The real cost of these systems isn’t just the licence fee but also the time spent on resolving alerts and conducting investigations. We spend a lot of time with our clients to understand how they interact with the system and the quality of the alerts generated. We incorporate this feedback into the user experience, constantly refining and enhancing it. This is an ongoing process for us.

Secondly, we’ve been rolling out what we call cross-product surveillance. Interestingly, while regulators often discuss cross-product surveillance, there aren’t many cases that mandate it as a requirement yet. At conferences, regulators often talk about cross-product surveillance, but practical implementation can be challenging. In many instances; regulators would need to collaborate across different asset classes, like derivatives and equities, which doesn’t always happen, or across different jurisdictions. Our clients hear about cross-product surveillance and request it, but there aren’t many specific use cases yet. However, we anticipate more cases as regulators in different parts of the world with jurisdiction across asset classes increase their focus.

Our cross-product market manipulation functionality is particularly exciting. It allows clients to compare any product in any asset class with another to detect manipulation. A good example is the Bitcoin ETFs approved in the US. With our system, you could potentially identify manipulation in the spot market versus an ETF, which operates in the equity markets. This is a prime use case demonstrating where we see demand growing.

Additionally, we’ve developed a feature called trader profiles. This helps us monitor how individual traders operate over time, including the names they trade, when they trade, and how they trade. If a trader deviates from their usual patterns, the system flags it for the client. This form of anomaly detection shows when someone is doing something different—not necessarily bad, but just different. We’re in the early stages of this, but it’s another exciting area we’re developing to assist our clients.

TTI: One of the things I’d be interested to get your insight on is the “buy to build” approach, which is something you’ve spoken about previously. Can you elaborate on this?

TS: Certainly. Alongside data governance and integrity, the “buy to build” approach is a major area of focus, particularly for tier-one clients. Instead of simply offering software as a pre-defined solution, we provide a more platform-oriented approach. This means we supply the essential data integration capabilities—covering the three main data sources—but allow clients to customise their experience based on their specific needs.

Clients can determine whether they require all the visualisations, just the workflow, or merely the procedure logic. This flexibility enables them to pick and choose the components they interact with. We’re still in the early stages, but larger institutions, which often have substantial resources, might not want our UI. Instead, they might prefer the data stream integrated into their own platform, or they might just want the feeds or results of procedures to feed into their system.

To support this, we have well-defined APIs that allow data to flow in and out of our system, enabling alerts to be sent to different systems or visualisations to be customised for specific results. While this trend is currently more prevalent among the largest institutions, we anticipate it will gradually extend to smaller entities as well.

Many of these clients have already invested significantly in their existing infrastructure and are reluctant to discard it. Instead, they prefer to fill in the gaps they perceive or leverage our expertise in specific areas. This approach is about combining the best components to deliver an optimal solution moving forward.

TTI: What do you see as the emerging trends and challenges in the trade surveillance and financial risk solutions industry?

TS: A general trend in the industry is developing a robust data platform—whether that’s a data lake or other data infrastructure—and then leveraging that platform. However, data infrastructure remains a challenge for many clients and the industry as a whole, given the need to normalise and analyse data across asset classes, communication protocols, and geographies.

“Componentisation” and the use of open APIs are trends that will continue to grow. We have always aimed to move at the speed of our customers. The more we can build into the platform to make it self-servicing and self-supporting, the better. This includes better data normalisation tools and workflow tools that clients can integrate with their existing infrastructure, whether that’s centralised infrastructure, alerting systems, workflow tools, or other investments they’ve already made. Every one of our clients has existing technology, and whether we’re replacing a legacy provider or just the trade surveillance engine, we aim to integrate smoothly with what they already have.

This trend of integration will only grow, especially as clients invest in modern tech stacks. They don’t want to discard these investments, and we certainly don’t want to force them to. We approach all our clients by working with their existing data, not forcing them to conform to a specific standard. We ask if the data answers the questions they want answered, contains all required timestamps, and is as detailed as they need. If it meets these criteria, we work with it as it is.

Data is increasingly valuable, and everyone is trying to monetise their internal data. We frequently discuss with our clients how we can work with their existing infrastructure. This trend is evident across all financial risk platforms, which are becoming more generalised analytics platforms. However, it’s crucial to remain specialised in certain areas because trade surveillance is a complex problem.

Being proficient with data is not enough; we also need to understand and adapt to new rules and regulations. Part of the value we provide is our expertise in financial risk, particularly in trade surveillance and algo monitoring. We strive to balance being both a versatile data platform and experts in financial risk. Achieving both is what makes us attractive to our clients and prospects.

TTI: Finally, Eventus was recently named the best trade surveillance solution at the TradingTech Insight USA Awards. You’ve won several similar awards in the past. What do recognitions like these mean to you and your team?

TS: We greatly appreciate these awards and the process behind them. They provide our clients with validation that they are choosing a top-notch vendor and partner. When we first started almost 10 years ago, we focused on these awards because, as a young vendor, they offered important validation for our clients. Now, with about 40 awards under our belt, they continue to affirm our expertise and capabilities.

These recognitions serve as external validation from the industry, demonstrating that we excel in what we do. They also assist our clients in building their case, whether they are replacing a legacy system or integrating a new vendor. Awards like these offer valuable supporting materials, reinforcing the decision to work with us. We sincerely appreciate the efforts behind these awards and the recognition they bring.

The post Building the Future of Trade Surveillance: A Conversation with Eventus CEO Travis Schwab appeared first on A-Team.

The awards were presented during a celebratory drinks reception after the close of A-Team Group’s TradingTech Briefing in New York City on 6 June 2024.

This year’s awards included more than 40 categories ranging from Best Matching Engine for Cryptocurrency Trading Venues to Best High Performance Network Services, Best Equities Trading Solution, Best Machine-Readable News Supplier, Best AI Solution for Trading, Best Trade Reporting Solution, Best Overall Market Data Provider, Best Specialist Market Data Consultancy and more.

An editor’s recognition award for USA Trading Technology Industry Professional of the Year was presented to Steve Schiff, Vice President, Index Technology at Nasdaq.

Andrew Delaney, President and Chief Content Officer at A-Team Group, said: “Congratulations to the award winners and thank you to all the vendors that entered A-Team Group’s TradingTech Insight Awards USA 2024, to our TradingTech Insight community that voted for its preferred solutions, and to our independent, expert advisory board that worked in collaboration with our editorial team to select this year’s winners.”

A complete list of winners and their solutions can be found in the TradingTech Insight Awards – USA 2024 report.

You can find out more about A-Team Group awards, which also cover RegTech, Data Management and ESG here.

The post A-Team Group Announces Winners of TradingTech Insight Awards USA 2024 appeared first on A-Team.

With proof-of-concept testing showing a 33% reduction in investigation time, Nasdaq now plans to implement the functionality across its U.S. equity market surveillance.

“Market abuse is a substantial global challenge and one that demands increasingly sophisticated solutions to address it,” commented Ed Probst, Senior Vice President and Head of Regulatory Technology at Nasdaq. “As a major regulatory technology provider to the world’s financial system, with a deep culture of innovation, Nasdaq is uniquely placed to leverage the power of technology to further enhance the tools and capabilities necessary to uphold the integrity of marketplaces globally.”

Regulators worldwide mandate financial institutions to demonstrate the continuous effectiveness of their surveillance systems and controls. Firms are expected to maintain comprehensive coverage across all asset classes and jurisdictions with scalable systems that handle periods of high volume and volatility effectively.

Typically, when conducting initial reviews of automated alerts, analysts need to manually gather extensive evidence before deciding whether further investigation is warranted. This process is resource-intensive, especially for alerts requiring deeper investigation. Nasdaq’s enhanced functionality, built on Amazon Bedrock, an AWS service for secure GenAI applications, enables analysts to swiftly perform detailed initial assessments of alerts by distilling, analysing, and interpreting relevant information.

“By drawing on the latest innovation in cloud technology and artificial intelligence, we can better respond to new threats and offer the global financial system advanced tools to more effectively tackle market abuse,” said Tony Sio, Head of Regulatory Strategy and Innovation at Nasdaq.

The post Nasdaq Unveils AI-Powered Feature to Enhance Market Surveillance appeared first on A-Team.

Iosif Itkin, co-CEO and co-founder at Exactpro, explains why and how the company’s award-winning initiative was developed and the benefits it can deliver.

A-Team: Please tell us about Exactpro and the types of capital markets clients the company works with.

Iosif: Exactpro serves various types of exchanges, post-trade, payment, market surveillance systems, as well as technology vendors. Although each of them is unique, our clients are committed to the same goal – providing compliant low-latency services to their end users and customers, and maintaining uninterrupted operations in an environment of ongoing change.

A-Team: What challenges are your clients facing at the moment?

Iosif: Capital markets firms face regulatory pressures and the need to optimise operational costs, modernise legacy systems and digitise and automate manual processes – the list goes on. Be it a specification change in a trading or payment protocol, expansion to a new asset class, or adjustment of risk management algorithms, it all trickles down to software or hardware changes that can potentially disrupt existing processes and leave infrastructure vulnerable to defects. It’s easy to imagine how many of these technical changes go into, let’s say, a platform migration.

Some software defects are relatively easy to detect, while others can stay dormant for months or years until triggered by a rare combination of conditions.

A-Team: How does Exactpro help customers address these challenges?

Iosif: As an independent software testing services provider, we put objectivity first, and objectivity comes from being informed about all aspects of the system. Due to our comprehensive approach, the extent and depth of our quality assessment goes well beyond supervisory, business or any other requirements. It allows us to obtain extensive knowledge of and control over the system we test, and stress it with multitudes of controlled outages, helping to pinpoint any vulnerabilities.

Since early 2023, our approach has been enhanced with machine learning (ML) and artificial intelligence (AI) techniques. They assist our human testers and significantly optimise their work in cognitively demanding tasks throughout the software testing process. Similarly to our clients, we continuously improve our methodology to provide services in a more efficient and transparent way.

A-Team: More specifically, please tell us why and how Exactpro developed its award-winning AI testing training course.

Iosif: Being a technology vendor that supports financial market infrastructure (FMI) transformations gives us the foresight and advantage to align our practices with the highest standards. In addition, we have long been committed to regularly sharing expertise well beyond our firm. Growing our own AI capabilities and seeing AI technology leapfrogging its way to industry adoption, we realised that we are uniquely positioned to help formalise and standardise skills assessment for technology professionals in this new context.

In early 2024, our Certified Tester-AI Testing (CT-AI) training curriculum for individual and corporate clients received accreditation from ISTQB, a global software testing certification body. This followed in the footsteps of the ISTQB-accredited Certified Tester Foundation Level training course that the Exactpro team taught to a global audience in a remote format from 2022 to 2023.

A-Team: What are the client benefits of taking the AI Testing course and, more broadly, how could the course benefit the wider industry?

Iosif: To ensure resiliency in the capital markets ecosystem, the industry needs solid guidance on efficient quality evaluation. The course provides a much-needed benchmark for the professional competence needed to operate ML and AI systems and assess their quality. The curriculum offers an extensive theoretical part and practical skills needed to comprehend, create, train and test intelligent systems. It also provides guidance on building AI and ML capabilities to facilitate the testing of complex infrastructures.

Our hope is that, with this educational initiative, the industry is one step closer to levelling the playing field and standardising the now disparate use of AI and ML techniques. The initiative should catalyse a transformative shift in terms of how quality and resilience are ensured in finance and beyond.

A-Team: Please run through a short case study of Exactpro’s award-winning professional development initiative.

Iosif: Use cases for taking the course vary, but it aims to serve:

• Those looking to learn the basics of AI systems and their quality assessment
• Specialists already using AI and needing to increase their level of confidence or organise their knowledge base and, of course, those planning to take the official ISTQB Certified Tester AI Testing certification for academic, professional or other purposes.

From the very first video session, participants – either individually or as part of organised groups – will start to get a structured in-depth view of:

• The types of AI and the unique quality characteristics of AI-based systems including flexibility, adaptability, transparency, interpretability and explainability
• Data handling and model training for ML
• Methods, oracles, performance metrics, acceptance criteria and test environments for testing AI systems, including neural networks
• Integrating AI into software testing.

In as little as 44 class hours, or in self-paced mode depending on preference, participants will get an exhaustive and critical view of AI and ML systems and a toolkit for responsible implementation and testing of their strategic initiatives.

Anticipating the needs of our audience, the course makes the ISTQB syllabus come to life. The course is highly visual and interactive, it aims to facilitate comprehension, accommodate various types of learners, and support them on their journey to taking the official ISTQB CT-AI exam, should they choose to do so.

A-Team: How will you develop the AI testing training course over the next year?

Iosif: We don’t plan to introduce changes to the curriculum in the coming year as we don’t expect changes to the official ISTQB CT-AI syllabus that our program already covers exhaustively. However, we will rely on the feedback from our first participants to further develop the variety and delivery of our supplementary materials and practice workshops.

We hope to see the course shape more and more skilled professionals and innovators equipped with the tools to responsibly drive ML and AI technology forward, for the good of their firms and across industries.

A-Team: Finally, what does winning A-Team Group’s 2024 innovation award for Most Innovative Professional Development Initiative mean to Exactpro?

Iosif: Promoting professional excellence has been a strategic direction for our delivery centres and the global Exactpro Group for a long time. Winning the award helps us reinforce Exactpro’s position as a technology and thought leader in our space. The team and I truly appreciate such high recognition of our work.

The post Exactpro Wins Award for Most Innovative Professional Development Initiative in A-Team Group Innovation Awards 2024 appeared first on A-Team.

This year’s platinum award winner is Regnology for its Most Innovative Regulatory Reporting Solution. Gold award winners include Interop.io, Quod Financial, S&P Global Market Intelligence, and SmartStream Technologies, with plenty more entrants picking up silver awards.

The Innovation Awards 2024 included over 40 categories across A-Team Group’s Data Management Insight, TradingTech Insight, RegTech Insight and ESG Insight news channels. They ranged from Most Innovative Smart Trader Desktops and Workflows to Most Innovative Data Standards Initiative, Most Innovative ESG Data Solution, Most Innovative AI in Regulatory Compliance Initiative, Most Innovative Data-Driven Transformation Project, Most Innovative Financial Technology Executive, Most Innovative Professional Development Initiative, and more.

A complete list of winners and their solutions can be found in the Innovation Awards 2024 report.

The post A-Team Group Names Winners of Innovation Awards 2024 appeared first on A-Team.

Previously classified as ‘off-channel’ by the firm, WhatsApp and Telegram have been integrated into Kyte’s communication framework in collaboration with LeapXpert and SteelEye, firms specialising in compliance technologies. This strategic partnership, which allows Kyte’s brokers to engage with clients on two of the most popular messaging platforms, allows for the seamless capture, archiving, and monitoring of communications, ensuring adherence to the regulatory standards set by the Financial Conduct Authority (FCA), the Securities and Exchange Commission (SEC), and other global regulatory bodies.

The Leap Work application facilitates advanced monitoring capabilities for WhatsApp communications, while Telegram interactions are managed through its native application. This compliance-enabled solution is adaptable to both corporate-owned and personal devices, with provisions for integrating additional communication channels as required.

Joergen Jaehnig, Deputy Head of Compliance at Kyte Broking, commented: “At Kyte Broking, we are committed to delivering exceptional service to our clients while upholding the highest standards of compliance. The partnership with LeapXpert and SteelEye has transformed our client communications and improved the efficiency of our communication processes.”

Avi Pardo, Co-founder and CBO of LeapXpert, added: “I’m thrilled to see the positive fruit of our partnership with SteelEye and the value it has already brought Kyte Broking. We have witnessed increasing demand for our solutions in both regulated and non-regulated markets in the past year, with a particularly significant surge among global energy and commodity trading firms, all eager to adopt modern channels in a governed and compliant manner. We’re dedicated to working with each firm to provide responsible business communications solutions.”

“Enabling firms like Kyte Broking to better serve their clients while maintaining the highest standards of compliance is fundamental to what we do,” said Matt Smith, CEO of SteelEye. “This is a great example of how technology can enable financial firms to comply with regulation while still operating competitively and providing excellent customer service.”

The initiative marks a significant shift in Kyte Broking’s approach to meeting client demands for accessible and efficient communication methods, while still maintaining the highest standards of regulatory compliance.

The post Kyte Broking Limited Enhances Client Communications to Include WhatsApp and Telegram appeared first on A-Team.

During a morning Keynote session, Andrew Delaney, President and Chief Content Officer at A-team sat down with Paul Liesching, Chief Revenue Officer at 1Global to discuss “Navigating the Complexity of Communications Surveillance.” 

An afternoon panel focused on “The Evolution of Communications Surveillance – How to Manage Risk, Improve Oversight and Ensure Compliance in Today’s Complex environment.” This panel comprised: Moderator: Anish Amin, Senior Manager, Surveillance, Macquarie; Justin Nathan, Head of Surveillance, Glencore; Simon Abbott, Global Head of Capital Markets Compliance, Northern Trust; Simon Hand, Global Head of Sales, 1GLOBAL Compliance; Phil Fry, VP Financial Compliance, Verint. 

Five core themes emerged form these two sessions and are presented along with anecdotal evidence gathered during background for this story.  

The Proliferation of Devices, Apps, Channels 

An audience poll indicated that one of the key challenges was “too many channels” with MS Teams and Zoom being the most prevalent followed by WeChat and WhatsApp. A follow-up poll asking about the key challenges came back with misuse of prohibited platforms, loss of data, lack of consistency across platforms topping the list. 

“BYOD seemed like a good idea at the time.” 

The increase in demand created a backlog in the approvals process which In some cases could take several months to complete. The economic case for BYOD was fine except it didn’t fully examine the compliance impacts of losing control of a single supervised and controlled comms channel and having it replaced with a plethora of unsupervised channels. 

Off channel communications use was already gathering steam but the COVID lockdown triggered a surge in digital mobile business communications and use of apps WeChat and WhatsApp among others. Apps like WhatsApp being offered through multiple service providers leading to different versions and another layer of complexity. 

Some observations from the panels – “Up until 2020, everyone was happy with a very basic set of things. So, voice and SMS, nine countries was fine. And that suited everybody. In the last four years there’s been a proliferation of new services that needs to be captured, triggered purely by what people get used to working from home during lockdown.” 

“We definitely saw an upsurge in network traffic during the lockdown but today, it’s higher than it ever was.” This observation really underscores the proliferation challenge, it’s here to stay.   

But it’s a problem that must be addressed, and soon. Regulators have shown they’re out of patience. Anecdotal evidence suggests that enforcement actions are having an effect and spurring firms to take action.  

AI/ML and GenAI in Comms Surveillance 

The output can look very convincing but still be factually incorrect. An LLM trained on a corpus of highly curated and polished compliance case histories can still generate non-compliant output. 

Transformer based engines – the GPTs – can do a much better job than traditional lexicon-based models but they require carefully designed prompting and a high-quality training data set.  

As one of the panels noted: “GPTs trained on trusted corpus of actual case histories and legal filings can deliver recall rates of 70% whilst lexicon-based models average 5%.” 

The question of explainability versus efficiency was put to an audience poll which asked to select the more important of explainability versus efficiency. The result showed 76% of the audience voting them equally important which came as a surprise. The need for explainability when undergoing a regulatory examination makes it a must-have. High false positive rates are the result of overly sensitive models designed to avoid a false negative “at any cost.” 

Regulators have made it clear; they expect that firms will keep systems updated and models calibrated to reflect the latest version of the rules. Equally important is ensuring their changes in their underlying risk profile due to changes in the business are also reflected.   

Anecdotal evidence suggests customers are resisting – “This is the model that got us through the last inspection – we really don’t want to touch it!”  

To which the regulators advise: “Don’t expect the next inspection to go well if we find that you haven’t kept things up to date!” 

The consensus from the afternoon panel was, given the current levels of false positives most firms are experiencing in their existing models, a meaningful improvement could be achieved with minimal risk by taking some careful first steps.  The advice to firms looking to take a first step is, above all else, get the skills and the training you need before taking on anything meaningful. 

Getting the Requirements Correct 

A common theme from the vendor community was a polite ask of their clients, “Please tell us exactly what you want, and ask us the right questions.” 

Again, the regulators make it clear that firms who include market abuse and comms surveillance as part of a comprehensive risk assessment fair a lot better under regulatory examinations. Drill down and understand how the risk profile in your firm changes across asset classes, markets and jurisdictions. 

Ask less about how the model handles false positives and more about the detailed use case and what the model needs to deliver. It’s important to be able to clearly define what a true positive is. It’s not the same as a false negative!  

Integrated Comms and Trade Surveillance? 

Analytics powered comms surveillance is still developing relative to trade surveillance which is a mature market with a lot of excellent/proven technology available. Attempts to bring trade and comms surveillance under a single control framework sound like a worthwhile goal. To be able to respond to an alert and visualize, in near real-time, all of the related antecedent comms and trade activity. 

This has proven a challenge in the past due to the differences in maturity and there have been several initiatives that ultimately went nowhere. But the capabilities of the new LLMs and GPTs might be the catalyst that finally makes this achievable. 

What’s on the Horizon 

Major changes are taking place in the mobile communications industry with GSM in retirement phase rapidly being replaced by 4G LTE and 5G. This mens a lot more bandwidth and capacity for larger apps. With GSM probably gone within 5 years, the possibility of a single messaging platform (Teams? WhatsApp?) emerging through consolidation. “Are we heading for a single personal messaging platform with a single number.” 

Generative AI has the potential to make major improvements in model efficiency and explainability and support better visualization and status of complex risk profiles.  

But there remains a lot of work to do to get clarity around the compliance of AI itself – particularly explainability – down to applying it to improve the overall performance of the comms surveillance function. 

Those are the hot topics on the comms surveillance agenda for Q1 of 2024.  

It’s going to be a busy year with EMIR Reft in April, T+1 in May and UK-Refit in September. 

The post 5 Recurring Themes from Comms Surveillance (Q1-2024) appeared first on A-Team.

“This outcome sends a clear message to market participants that breaches of market integrity rules will result in substantial penalties that should not be seen as a cost of doing business.”

Market Abuse and Trade Surveillance were the focus of a recent A-Team Group webinar that brought together representatives from the regulatory, market participant, and vendor communities. 

The panel was moderated by Sarah Underwood, Editor at A-Team Group, and comprised Yasmin Lee, EMEA lead for Surveillance at Macquarie, focusing on trade e-comms, voice, and commodity markets; Jamie Bell, head of Secondary Market Oversight at the FCA; and Dermot Harris, Head of Regulatory Solutions at OneTick.

The webinar was conducted under Chatham House Rules; hence any quotes aren’t attributed to a specific panel member.

The Current State of Trade Surveillance
An opening audience Poll asked the question: “To what extent is your organization satisfied with its trade surveillance for market abuse?” The majority response (90%) was satisfied (53%) or somewhat satisfied (37%) with room for improvement in both cases.

Lack of regulatory clarity in other jurisdictions can make a case for investment difficult. For example, statements from regulators like the following do not help the business case; “Well, we’re not gonna obligate that you have surveillance, but, if we investigate you and we find some wrongdoing and you have gaps, then the fines will reflect that.”

Cyber risk and data security are also factors affecting trade surveillance. During the pandemic, smaller firms conducting business over the public internet were exposed to, and some suffered ransomware attacks. The message from the panel is clear; “Cyber risk is as dangerous as regulatory risk and financial risk.”

There is a trend towards hosted surveillance solutions. It is far easier to keep a hosted cloud-based surveillance system current. On-prem surveillance systems, whether third-party or homegrown, can quickly become out of date with performance falling and end-users losing confidence in the system.

The consensus from the panel is that resilience is improving. Enforcement actions by regulators are having an effect. The size of the penalties being imposed, in the tens – in some cases hundreds – of millions of dollars, is letting market participants know that “breaches of market integrity rules will result in substantial penalties.”

While firms have been making progress with upgrading their trade surveillance systems and processes there remains a lot to do, keeping systems updated and models recalibrated as regulations and front office activities change over time is a particularly challenging area.

Challenges and Solutions for Effective Trade Surveillance

A second audience Poll asked: “What are the ongoing and emerging challenges of achieving effective trade surveillance at your organization?” 

By far the majority response (84%) was “Legacy systems and processes” followed by “Meeting requirements for real-time monitoring (44%).

Staying ahead of front-office innovations like algo trading, and emerging markets like crypto and carbon is a challenge for control functions. The Front Office has the budget and the incentive to innovate with the latest technologies (AI/ML) and create novel financial derivative structures. Firms can very quickly fall out of compliance as control functions struggle to adequately surveil these new AI-powered processes.

Legacy systems and processes can be hard to adapt to structural changes in market practices and meet transparency requirements. 

Lack of risk model expertise outside the front office manifests itself as a lack of concern over surveillance model risk. One of two scenarios is typically encountered; in the first instance, the model is tuned to suppress alerts completely, and in the second case, the false positive rate is almost 100%.

The fear of recalibration and obsession with false positives by firms creates challenges for everyone, not least the firm itself!

When hundreds of thousands of alerts are generated per day, it is impossible for a manual system to triage everything, and true positives can go unnoticed. The ASIC case against Openmarkets cited at the top of this article highlights the risk of not recalibrating.

Firms have started to calibrate alerts, albeit reluctantly, following the FCA publication Market Watch 69. Previously, firms were demanding that vendors guarantee their default parameters meet the regulatory requirement. AI and machine learning have been an integral part of proprietary trading for many years. It is important that control functions also embrace and master these tools if they are to adequately meet their supervisory duties.

In response to an audience question about the benefits of surveillance beyond ‘mere’ compliance, panellists suggested that the broader benefits of effective trade surveillance include market confidence, a reduction in economic activity costs, and uncovering other organizational issues. The specific benefit, panellists agreed, is the firm’s ability to meet compliance requirements at a lower overall cost and improved efficiency through effective automation. 

Action Item 

So what should practitioners be doing?

The panel suggested that a comprehensive and up-to-date market abuse risk assessment (MARA) is the first step in establishing a comprehensive fit-for-purpose surveillance system, targeted to the identified risk profile of the firm. There is no “one size fits all” solution.

Investigations of Market Abuse cases typically lead to the discovery of one or more of the following best practices being incomplete or missing; a Surveillance system designed to meet the firm’s MARA, people, and processes capable of reacting rapidly to alerts, and an analysis of near misses (false positives). Firms that can tick all these boxes tend to fare better.

Strategies for ensuring that surveillance systems remain current and effective in detecting and preventing market abuse, include hosted solutions that leverage cloud technologies, and maintaining active engagement with vendors and regulators.

The UK FCA is leading the way in regulatory innovation and market support. The FCA Innovation Hub offers participants a Regulatory Sandbox to test product innovation in a virtual market with real customers, and Digital Sandbox offers a range of sanitized and synthetic data sets to test and develop new innovative products.

Firms should take advantage of the FCA publications including the Market Watch 69 publication on Market Abuse Regulation (MAR).

Pay attention to data and cyber security. The message from the panel is clear; “Cyber risk is as dangerous as regulatory risk and financial risk.”

Getting the skills to build and sustain a robust surveillance framework is critical. When firms are developing requirements, they must get past naive questions about how the model detects a false positive and ask about how true positives are detected, how false negatives are suppressed, and how weak cases (false positives) can be used to detect underlying trends. A False positive is a weak case that failed to meet the case for triage. These cases should not be discarded, and firms should be asking vendors to explain how their solutions make use of this data. Must-haves for a trade surveillance solution should include easy calibration, AI/ML-powered analysis of false positives, model risk management and operational security.

The panel was asked what’s coming next in Market Abuse and Trade Surveillance?

With this challenge in mind, vendors are looking at a more automated “black box” risk model that automatically adjusts alert parameters based on observed history. Vendors will have to meet transparency and explainability requirements for these models to become accepted by the mainstream and regulators.

The UK FCA has redefined the relationship between a regulator and the market it monitors, by genuinely fostering innovation through publications, development sandboxes, and access to extensive sanitized and synthetic market data. The extent to which regulators in other jurisdictions follow this example will be a factor in controlling market abuse globally.

The post Best Practice Approaches to Trade Surveillance for Market Abuse appeared first on A-Team.