Trade Surveillance Goes Cross-Product


Detecting potential cross-product market manipulation is becoming a greater necessity for firms as the Securities and Exchange Commission has brought one enforcement case against the practice in recent weeks.

As part of the regulator’s complaint, the defendants are accused of selling equities at a loss to affect the prices of related options which they then traded for a profit using the artificial price.

Creating the logic necessary to detect such manipulation is not that difficult, according to Michael Friedman, the Chief Compliance Officer of compliance software provider and proprietary trading firm Trillium Management.

Micheal Friedman,
Trillium Management

“The difficulty is getting these fairly large data sets from the different marketplaces and having them play nice with your logic filters and being able to apply the logic to those data sets,” he said.

Trillium recently added support for futures trading to its Surveyor trade surveillance platform.

Updating the logic filters was not that difficult since the fundamentals of manipulating the market are relatively the same, according to Friedman.

“If you’re looking for spoofing, you might look for a bunch of orders on one side followed by an execution on the other side and then the cancellation of the remaining orders on the original side,” he explained.

Nevertheless, Trillium had to add additional spoofing scenarios to its platform since the Commodity Futures Trading Commission uses a different definition than the SEC.

Friedman noted that some cross-product market manipulation might be harder for regulators to prosecute than others.

“When you start talking about an ETF in equities and a future product that tracks the same thing, you’re crossing the divide between the CFTC and SEC where you have no common regulator,” said Friedman. “There’s no policeman with that vantage point to weave together those two data sets.”

It does not mean that Trillium is not working on those types of scenarios, he added. “We are working on that. There is this jurisdictional barrier to serious enforcement on that subject.”

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