The Seven Pillars of Market Surveillance 2.0: Pillar #1


The Seven Pillars of Market Surveillance 2.0: Pillar #1

By Theo Hildyard , Software AG

In the first of a blog series outlining the Seven Pillars of Market Surveillance, we investigate the need for Market Surveillance 2.0 – a new set of requirements that will act as a kind of crystal ball that can help us to anticipate and prevent anomalous behaviors before they have any impact on the market.

Financial markets scandals such as manipulation of the LIBOR rate and FX fixing prices, to the Flash Crash that wiped a trillion dollars off the US stock market in minutes and a wild algorithm that all but bankrupted broker dealer Knight Capital, show us that financial markets surveillance is more critical than ever.

Theo Hildyard, Software AG

Theo Hildyard, Software AG

The crystal ball analogy is apt because being able to look into the future to see the early warning signs of unwanted behaviors, spotting the patterns that could lead to fraud, market abuse or technical error, and alerting the relevant managers or triggering business rules can ward off these kinds of crises. Market Surveillance 2.0 will make it possible for financial services firms to monitor data from multiple flows, analyze it on the fly and act quickly to prevent the next big scandal.

A combination of monitoring and surveillance, involving both data and human behaviour across multiple asset classes and geographies, will help firms to see the early warning signs and anticipate —or even avoid – these types of crises in the future.

There are seven key ingredients to achieving the next generation of surveillance; or the Seven Pillars of Market Surveillance 2.0.

Market Surveillance 2.0: Pillar #1

The first critical Pillar in the Seven Pillars of Market Surveillance 2.0 is a convergent threat system; integrating previously siloed systems, such as market surveillance, operational risk, market risk and trader profiling, into a single monitoring system to enable a more correlated view of potential threats.

The key to this approach is recognizing that potential threats are simply behaviours and a behavioural monitoring platform can be re-purposed for all manner of risk and compliance challenges, as long as it:

  1.  Comes with sufficient performance at scale to monitor very large volumes of streaming analytics, both pre and post trade
  2. Is open and flexible enough to allow organizations to tailor monitoring based upon their unique and changing requirements. After all, there will be a far greater emphasis on agility and application vendors will struggle  to keep up with firms that can tailor their own systems
  3.  Is seamlessly pre-integrated with complementary technologies such as enterprise grade integration, ultra-low latency messaging, in-memory data management and real-time data visualization – all the raw tools needed to break down monolithic silos.

But how does this improve upon where we are today? It will go a long way toward preventing another Libor or FX scandal by being able to see across all business units, asset classes and geographies and monitoring both humans and technology.

To date, many risk and surveillance systems remain in separate silos, where each division or business unit has its own ecosystem of practices and technologies. The Chartered Institute of Management Accountants (CIMA) says that silos “allow risk specialists within a business unit to work in physical isolation and inhibit collaboration with other business units.”

There is a clear danger to managing risk in siloes; witness Royal Bank of Scotland during the financial crisis. Prior to the crisis, RBS was believed to have effective risk management. History shows us otherwise, as the bank had to be bailed out by the UK government in 2010 after credit market positions drained its reserves. A CIMA report largely blamed silos.

Converging previously siloed systems into a single monitoring system gives you not only a single view of risks across the enterprise, but also allows you to take actions within one seamless framework. And, of course, convergence lowers the total cost of ownership and simplifies the IT picture.

The days of risk being managed in separate departments, by asset class and geography are numbered. Only by converging all risks and monitoring them from one system can you see the threats as they come at you. Or, by looking into your Market Surveillance 2.0 crystal ball, you can see them before they even become threats.

The Seven Pillars of Market Surveillance 2.0 will lead you to the next generation of bigger and better market surveillance, leaving the fines and prison sentences behind. We will be exploring these Seven Pillars in depth over the next few weeks, so stay tuned.

My next blog will focus on Pillar #2 – support for historical, real-time & predictive monitoring.

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