06.21.2013
By Terry Flanagan

Firm58 Takes on Compliance and Surveillance

To manage data within the area of trade compliance, financial-market participants are increasingly turning to external providers for best economics and implementation.

Earlier this week, Chicago-based Firm58 launched a Compliance and Surveillance transaction-monitoring product to help broker-dealers keep pace with regulatory requirements. Designed to capture issues generated by orders, cancels and trades, early feedback from clients has been positive, said Sam Mele, the firm’s co-founder and managing director.

Compliance and surveillance products represent a cost for broker-dealers, but the value proposition is that it reduces the risk of an adverse or even catastrophic event resulting from a bad trade. Regulators expect trade handlers to monitor their activity, but trades considered manipulative can get lost in reams of data. Financial penalties and reputational damage can be the end result; the Financial Industry Regulatory Authority has recently levied multi-million dollar fines for failure to supervise, and the Federal Bureau of Investigation has been involved in some cases of alleged market manipulation.

Firm58’s new web-based Software as a Service (SaaS) product, called Firm58 Compliance & Surveillance (C&S) is built for equity and option broker-dealer compliance officers, and utilizes the same architecture of other Firm58 offerings such as Billing, Profit Analysis and CSA Soft-dollar Management. Firm58 C&S detects patterns and captures orders and executions which could imply violations such as order spoofing and quote stuffing, Mele said; the software also detects potential issues arising from large orders, order exceptions on close, odd lots, short and wash sales, and marking the close.

“A primary objective of the product is to identify issues before they are deemed violations, thus avoiding regulatory fines and penalties which in some instances have forced firms out of business,” Mele said. “The software and our business model are scalable. Firm58 C&S can be utilized by small-to mid-sized firms as well as the largest broker-dealers in the industry.”

Mele noted that smaller brokers face the same compliance requirements as larger competitors, who are better positioned to manage via in-house resources. “Developing a comprehensive compliance program is a high-priority initiative that all firms are under pressure to provide,” Mele said.

Firm58 has historically focused on areas related to payments, fees and commissions and the ability to show clients’ daily net profit through multiple prisms. C&S was a logical product-line extension given it addresses a front-burner issue of many market participants.

“’Big data’ management, cross-asset 24/7 international trading, futurization of credit and interest products, centralized clearing, social media leverage, regulatory scrutiny – all must be dealt with,” Mele said. “Several major industry-wide shifts are all occurring at once, making operating a broker-dealer more difficult than ever.”

Firms have tended to focus on how they can increase order flow, and have directed their spending to that end. However, with margins shrinking, cost-containment and operating efficiency initiatives have shifted upward on the priority scale, Mele noted. “Our solutions simultaneously increase revenue and reduce costs,” he said.

 

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