U.K. Regulator Ramps Up Market Surveillance

Terry Flanagan

U.K. regulators are trying to keep on the coat-tails of market abusers by adopting market surveillance technology that is already used to monitor over half of all European equity trades.

The Financial Services Authority (FSA) has opted to use the Smarts system from Nasdaq OMX, the transatlantic exchange operator, in a bid to crack down on suspicious algorithmic trading activity.

“It is designed to weed out market abuse,” Paul McKeown, vice-president of market technology at Nasdaq OMX, told Markets Media. “It will help the FSA identify high-frequency trading and algorithmic patterns that are taking place and really help exchanges and regulators identify market abuse.”

Regulators around the world are concerned about the rise in automated trading and its potential for market abuse—due to the ever-increasing speed and complexity of many orders—and they want to put processes and checks in place to monitor the growing practice.

“New trading structures and advanced trading strategies coupled with huge data sets makes the task to monitor trading activities and markets a very interesting challenge today,” said Magnus Almqvist, senior product specialist at SunGard’s capital markets business, a U.S. trading and technology firm.

In Europe, for example, the European Securities and Markets Authority (Esma), the pan-European regulator, has recently introduced detailed new reforms to better monitor algorithmic trading practices such as high-frequency trading. These rules on automated trading are now beginning to be applied across the whole of the European Union.

“With the Esma regulations coming through, the implementation of Smarts at the FSA means that Nasdaq OMX will continue to gain a unique understanding of market surveillance in Europe,” said McKeown at Nasdaq. “As and when regulators start to look at pan-European surveillance we will be very well equipped to provide this if and when the regulatory bodies start to move in that direction.”

The Smarts system is used by 30 exchanges across the globe, including Bats Chi-X Europe, the Swiss Exchange and Nasdaq’s Nordic markets. While 10 regulators now use the technology, including watchdogs in the U.K., Australia, Singapore, Hong Kong and Canada. Some broker-dealers also use a similar Smarts system to monitor trades.

At present, the FSA will only be able to use the Smarts system—which will be able to monitor cash equities, options, futures, foreign exchange and over-the-counter trades—to oversee reported trades, potentially missing manipulatory tactics that take place on the order books.

“The initial stage is looking at transaction reports,” said McKeown. “But we will be looking at the order side as well. Certainly we see ourselves working with the FSA and others to assist in a more broader surveillance function.”

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