Nasdaq Develops Buy-Side Compliance

Shanny Basar

It has been just over a year since Nasdaq, the US exchange group and technology provider, completed the acquisition of Sybenetix, the London-based surveillance provider for the buy side that uses behavioral analytics and cognitive computing.

Sybenetix, now part of Nasdaq Buy-side Compliance, developed a behavioral profiling algorithm to detect rogue trading patterns. The system generates a behavioral heatscore, ranks specific actions and send alerts to the compliance department for any cases which may need investigation, making the process more efficient. This is important for asset managers who typically have smaller compliance departments than the sell side.

Taras Chaban, former chief executive of Sybenetix, has become Nasdaq’s head of buy-side solutions in the market technology division. He told Markets Media that Nasdaq can now monitor the entire order flow from fund managers to brokers and exchanges.

“The buy side is still a long way from full adoption of automated surveillance tools,” Chaban added. “They are under pressure from both regulators and asset owners, as part of their due diligence.”

Before founding Sybenetix in 2009 with Wendy Jephson, the firm’s chief behavioral scientist, Chaban was a fund manager at hedge fund GLG Partners. Previously he was also a proprietary trader at Dresdner Kleinwort and Credit Suisse and principal consultant at software company Mathworks. Chaban is an expert in machine learning with an M.Phil. in artificial intelligence.

Nasdaq announced the agreement to acquire Sybenetix in July last year for an undisclosed amount.

Adena Friedman, Nasdaq

Adena Friedman, president and chief executive of Nasdaq, said at the time: “We believe behavioral science, cognitive computing and machine intelligence are essential to a successful, holistic surveillance offering and critical to efficient and effective organizational compliance with an increasingly intricate global regulatory environment. This acquisition accelerates our offering to the buy-side and advances our ambitions to expand market integrity controls into all segments of the capital markets.”

Friedman said at Nasdaq’s investor day in March this year that one of the group’s strategic priorities is to become a technology and analytics provider to active asset managers, private companies and non-financial markets. Meeting this objective requires reallocating resources to growth opportunities, which include market technology and information services.

In surveillance Nasdaq purchased Australia-based Smarts in 2010, primarily to provide on-premise software for regulators and markets. The following year Nasdaq introduced a service as a software model for the sell-side. Surveillance has now been extended to asset managers and hedge funds with Sybenetix.

Lars Ottersgard, Nasdaq

Lars Ottersgård, executive vice president, market technology at Nasdaq, said at this year’s investor day that since the Smarts acquisition, the platform has grown to cover four times the number of market places and clients; and has 10 times the number of subscriptions.

For example, Hong Kong Exchanges and Clearing Limited became the first exchange customer in Asia to successfully deploy Nasdaq Smarts Market Surveillance’s latest machine learning and participant relationship discovery technology across its equity market in April this year.

Growth opportunities

Chaban said the Sybenetix deal provided enormous growth opportunities and would accelerate new product development for the buy-side. He told Markets Media: “Since the acquisition we have focussed on information security, enriching our data sources and new product additions.”

For example, the Sybenetix code had to pass stringent testing and then move to the Nasdaq cloud and infrastructure. Nasdaq also has many in-house data sources which can be integrated to make alerts for suspicious behaviour to become more accurate.

Prableen Bajpai, founder and managing partner at FinFix Research and Analytics, said in a post on the Nasdaq website that the  exchange also launched an alliance with Digital Reasoning so that natural language processing and machine intelligence-based technology could be used to improve Smarts surveillance.

Bajpai wrote: “Digital Reasoning’s Synthesys has delivered impressive results to institutions including UBS, Goldman Sachs, and Point 72 with documented outcomes such as a 250% increase in detection acuity, 50% reduction in false positives, and a quadrupling in efficiency making it feasible to extend electronic communications surveillance to 100% of employees. With Sybenetix, Nasdaq will be better equipped to resolve key surveillance challenges facing the asset management industry.”

Balance sheet shifts

Taras Chaban, Nasdaq

Chaban said: “As balance sheet use has moved from banks to other financial intermediaries, so has the attention of regulators which is shown in the requirements of MAR and MiFID II.”

MiFID II regulations went live in the European Union this year and the Market Abuse Regulation came into force in the region in 2016. MAR required market surveillance to capture market manipulation intent for the first time, as the previous obligation to report suspicious transactions has been extended to include suspicious orders. The regulation also widened the requirements from large banks and brokers to the buy side and smaller firms.

Chaban posted this month on Nasdaq’s Marketinsite blog that the UK’s Financial Conduct Authority has taken an important step in enforcing MAR within asset management by sending a questionnaire asking about risk management procedures for reporting and preventing manipulative behaviors.

“This action reinforces the need for buy-side firms to deploy  automated systems and controls in the monitoring and detection of market abuse and manipulative behaviors such as insider trading, front-running, and window dressing,” wrote Chaban. “Without proper controls, these firms face potentially severe fines and penalties, but they may suffer irreversible damage to their reputation.”

New products

Since the acquisition, Nasdaq Buy-side Compliance has also introduced surveillance for side by side management and personal accounts. Side by side surveillance is ensuring that all investors are treated fairly regardless of fund fee structure or past performance. Personal accounts surveillance monitors individuals’ accounts for the possible misuse of insider information or trading ahead of fund movements.

“We have a number of product ideas on the roadmap and a good pipeline of prospects for 2019,” added Chaban.

He wants the analytics that Nasdaq now provides to be used for more than surveillance.

Chaban concluded: “Our long-term vision is to increase the value to our customers through a number of applications in risk management, asset allocation and alpha generation, allowing fund managers and traders to make better decisions.”




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