Getting Up to Speed in Fight Against Market Abuse

Terry Flanagan

As new guidelines and regulations begin to kick in over trade monitoring, market participants are scrambling to comply to the strict new landscape.

With ever more trades taking place faster than the blink of an eye, regulators are being forced to introduce new rules to monitor the growing practice and also crack down on more illicit behavior such as market abuse.

The European Securities and Markets Authority (Esma) is leading this charge amongst regulators globally after introducing tough new guidelines in May on how to better monitor algorithmic trading practices such as high-frequency trading.

“Increased pressure from national regulators, combined with the introduction of the Esma guidelines and the forthcoming revision of the [European Union] Market Abuse Directive means that all financial institutions are under intense pressure to improve their compliance processes across the board and in particular in the area of automated market abuse surveillance,” said Wolfgang Fabisch, chief executive of b-next, a German-based provider of market surveillance software.

Exchanges, who are experienced in trade monitoring, are increasingly being used by regulators as their eyes and ears in the fight against market abuse and many are updating their surveillance software to be able to better understand and report any suspicious trading activity—and also not fall foul of the new rules.

For instance, the London Metal Exchange, the world’s largest metals exchange, has recently signed a deal with MillenniumIT, the technology division of the London Stock Exchange, to upgrade its surveillance software.

“We are confident that this [new surveillance platform] will enable the LME to accurately monitor its markets, providing real time detection of abnormal trading patterns,” said Tony Weeresinghe, chief executive of MillenniumIT and director of global development at the London Stock Exchange Group.

The new software will enable the LME to have a real-time, multi-asset class surveillance platform in place.

“MillenniumIT’s surveillance application will provide us with a very flexible real time analysis of trading patterns,” said Diarmuid O’Hegarty, deputy chief executive of the London Metal Exchange.

“This will enhance our ability to detect and query real or apparent market abnormalities.  The flexibility of the surveillance platform will allow the LME to develop new alerts, to adapt to market changes and to manage volume growth.”

Vendors, too, are helping firms make more sense of today’s trading environment—and avoid regulatory fines and reputational losses in the process—by offering them an array of new kit to become compliant with their market abuse and best execution obligations.

b-next, for example, has recently unveiled CMC:Lite, an entry level version of its CMC:Suite, to provide clients with a key set of compliance scenarios required to perform effective surveillance and analysis of trading activity.

“We have listened to the market and have responded by launching CMC:Lite,” said Fabisch, who says the system also offers market data and system hosting capabilities.

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