Sell Side Raises Bar on Trade Surveillance


This is the second feature in a sponsored content series from S3. The first was a chat with S3 CEO Mark Davies

The sell side wants change in the options currently open to them when it comes to trade surveillance.

Market surveillance has been one of the newer catch phrases to hit the financial and equities marketplace. Being on the lookout and able to snuff out nefarious or problematic trading behavior before it occurs and preventing adverse price selection or worse is forefront on the minds of the sell side and the institutional trading clients they service.

Interest and demand in trade surveillance and monitoring technology has significantly grown recently due to regulatory pressures, operational changes and technological advancements. In particular, regulations such as MiFID and MAR have driven implementation and have played a significant role in the adoption of trade surveillance technology.

Increasing trade automation and market structure is providing fertile ground to a broad spectrum of abusive behaviors and compliance obligations. This has set the stage for increasing regulatory oversight where the burden of proof rests with market participants (the sell-side or brokers) to demonstrate control over their trading. Trade surveillance solutions can address these issues by conducting examinations of order flow supporting end-to-end breach detection, alert workflow management, market data and historical replay activities.

Nasdaq noted in a recent whitepaper that firms must monitor trading on an ever-expanding number of markets and require visibility across multiple venues and asset classes with a pool of data that is growing at a dramatic rate. As regulatory authorities continue to raise the stakes, having systematic controls and surveillance procedures in place is critical.

Historically, there have been only a handful of market surveillance products such as SMARTS from Nasdaq and Trillium. According to market sources, both these systems raise market concerns as one comes from an exchange and the other a proprietary trading firm – this raises questions about their independence and neutrality. When it comes to SMARTS, some traders told Traders Magazine that the product focuses more on non-US clients, exchanges and larger customers, leaving smaller firms underserved. As for Trillium, one person explained that having a prop shop that trades for itself monitoring the market raises issues with data collection, usage and storage.

So, what is a broker to do?

Enter S3, an independent firm that is looking to court the sell side and help them provide better service and analytics to the buy-side. Sounds like a win-win, right?

S3 recently launched its Trade Surveillance Suite, a system designed to assist compliance and trading professionals identify market manipulation. With this expansion away from its core execution analytics offering, the firm looks to offer customers a single solution to address all of their compliance needs.

The Trade Surveillance Suite’s goal is to simplify monitoring for market manipulation and trading violations, reducing the time spent on compliance issues without compromising on regulatory obligations. Clients can monitor for such trade activities as spoofing, layering, marking the close and trade-through while reducing false positives and facilitating cross-product manipulation monitoring. The system makes use of a powerful interface that allows users to create and adjust custom thresholds and apply the adjusted thresholds to historical data. By comparing outcomes, customers are able to optimize settings, reducing the risk of both false positive and false negative results, drastically improving identification of potential trade violations while simultaneously reducing time wasted on spurious leads.

Mark Davies, S3

Once an irregularity is discovered, the Trade Surveillance Suite provides a configurable workflow to document the violation and to archive all of the relevant information for future reference.

Mark Davies, CEO of S3 told Traders Magazine that the new offering allows his customers to “identify, document and track issues quickly and easily while providing an exceptional level of adjustability and refinement, thereby improving trust between regulators, broker-dealers and their clients.”

S3’s infrastructure is based upon robust, long-term availability of market data, efficiently indexed for rapid access. This market data is integrated with client data by the firm’s proprietary matching engine, forming the foundation of the S3 platform. The S3 Reporting Suite builds upon this base, enabling clients to view, analyze and manipulate their data in reports built specifically to meet their best execution and surveillance needs.

“Older and larger trade surveillance systems leave a large swath of the marketplace – US-based firms  and the smaller brokerages either underserved or not served at all,” Davies explained. That is where his firm comes in and looks to make its name.

So, what do the brokers want when it comes to trade surveillance?

Josh Barry, S3

They want post-trade surveillance on market manipulation. S3’s goal is to help the brokers comply with the regulations regarding their fiduciary responsibility and Finra-mandated obligations to conduct surveillance. And of course, broker dealers who are under constant price pressures, would rather farm out their needs as opposed to building their own systems.

“Brokers must have some type of system in place and the options are now very limited,” S3’s Chief Software Architect Josh Barry said. “And as we are providing some of their services already, it’s a natural extension for us to make the jump into market surveillance.”

And this broad reach out by S3 is happening up and down the broker tier curve – not just at the bottom “underserved” but also at the mid to larger firms, Barry added. Many brokers, he said, are looking to have one vendor do more things for them to help control costs and let technology savvy vendors do what they do best – provide technology solutions.

One such firm is online discount broker Regal Securities, where President and Chief Operating Officer Shawn Herrin told Traders Magazine that his firm has been actively looking at a vendor to  provide trade surveillance and canvassed the landscape trying to find the best balance of cost, technology and functionality. As a broker, his firm needs to be able to sift through myriad orders and separate the wheat from the chaff and it is more cost effective to use an outside vendor such as S3.

“We’re managing and monitoring different lines of business, and we need a certain degree of sophistication to check for spoofing and layering, not just garden variety post-execution review on an order basis,” Herrin explained. “So, instead of building that out ourselves, and we’d have to have a data feed and other things to do such, we looked to outsource that function.”

Shawn Herrin, Regal Securities

And this outsourcing is not just going on at Regal Securities but other firms, Herrin added. As regulators look to the brokers for more data and insight into trading practices and activity the need for a trade surveillance system grows.

“Specifically, the spoofing and layering concerns are very much at the forefront of regulators minds. For our peace of mind and ability to monitor for these types of things, we’re looking to expand our abilities,” Herrin said.

Regal uses S3 for trade reporting and recently began the process of onboarding the vendor for trade surveillance too. While regulator inquiries are infrequent, Herrin said his firm wants to be proactive and stay ahead of the regulatory enforcement curve and have the data in hand – ready to meet an inquiry at a moment’s notice.

“We want to be aware of certain behaviors that need to be curtailed. Certainly, we don’t want to run afoul of the regulators and are aware of the enforcement actions that have come down in this area,” Herrin said. We don’t want to be exposed to that.”

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