Financial services firms are spending hundreds of millions of dollars on surveillance systems as regulators push for monitoring across asset classes and both cash and derivatives markets.
Richard Bentley, vice president at Software AG told Markets Media: "Financial services firms are spending hundreds of millions of dollars as a direct response to regulatory action - it is their number one business priority."
One head of compliance at a large bank said: “We have historically focused on surveillance in the equity cash market but now we are thinking about foreign exchange and the risk of collusion in every asset class. In the past firms used to spend the absolute minimum on compliance but that has now changed.”
The financial sector has been under pressure to improve surveillance as regulators have been carrying out high-profile investigations such as the alleged rigging of foreign exchange rates and benchmark interest rates.
Software AG owns Apama, a system that was developed by two Cambridge University computer scientists to analyze streams of data and find patterns in capital markets. Apama had traditionally been used in the front office but Bentley said that in the last couple of years there has been rapid growth in the use of the technology for surveillance.
"There's no doubt that the rate fixing scandals have provided additional impetus for our business. Customers who use us in equities for example are expanding usage into foreign exchange,” he added. “We have also gained new customers, including some of the banks forced to deposit money with the Singapore regulator in the wake of the NDF rate fixing scandal."
Bentley said the technology for effective surveillance of foreign exchange trading is essentially the same as for equities or other products. He said: “The differences mainly lie in the monitoring strategies - for example, to detect FX trades being split into smaller sizes during the 4pm fixing window, to better influence the median rate used as the fix point."
Thomson Reuters said this week that it has partnered with b-next, a capital markets compliance technology provider, to launch Accelus Market Surveillance. The managed service combines b-next’s surveillance software with Thomson Reuters’ market data and news analytics to provide to monitor market abuse across a broad range of exchange-traded and over-the-counter asset classes.
Adrian Guest, Europe, Middle East and Africa sales manager at b-next, told Markets Media: “We have gone live with one European client but there are many more that we are talking to. The partnership with Thomson Reuters and allows us to stretch towards providing a global solution.”
He added that sell side firms are broadening surveillance from market abuse to insider dealing and conflicts of interest, such as when employees deal with sensitive information. “Firms want to expand surveillance in one system rather than on disparate systems,” he said.
Thomson Reuters Accelus Market Surveillance provides systematic surveillance of trading activity to detect market abuse, suspicious trading, price manipulation and insider dealing which appeals to sell side firms but Guest said b-next has been receiving more queries from asset managers.
“We are seeing buy side interest with regard to conflicts of interest, insider dealing and information leakage rather than market manipulation,” he added.
Mike Powell, head of enterprise solutions at Thomson Reuters told Markets Media that Accelus Market Surveillance helps customers respond to increasing regulation that demands greater systematic visibility of their trading activity.
“We have deployed it into our managed service infrastructure in Europe and plan to do it in the US as well,” Powell added. “We’ve been witnessing this huge wave of regulatory change, as various authorities are looking to restore discipline to financial markets. In Europe, there’s MifiD and Market Abuse Directive. In US, there’s Dodd-Frank. “
Powell said that while large clients may have in-house expertise to build their own surveillance platforms, smaller firms need to buy a system but still need to integrate all the trade, and reference data.
“We not only provide the software, hardware, and operating system, but we’ll pre-integrate our tick data, news and reference data, and help you onboard your trade feed into that environment,” Powell said. “So we’re creating and end-to-end solution rather than just selling a piece of software and expecting the client to build and manage it themselves.”
The head of compliance said installing a third party system is preferable to building a system in-house. He said: “A widely-used vendor platform has more credibility with regulators and it is easier to prove you are meeting the best industry standards.”