Regulation & compliance | Market surveillance I
mposing a fine of £42.4 m on UBS following the conviction for fraud of former trader, Kweku Adoboli, the UK’s Financial Services Authority (FSA) cited systems and control failings that “revealed serious weaknesses in the firm’s procedures, management systems and internal controls”. The fine, which was discounted to £29.7m for early settlement by the Swiss bank, was handed out in November last year and is just one of a growing number of increasingly hefty penalties imposed on financial firms. In the US, financial regulators are also cranking
up the pressure on firms via large fines. During the past three years, the Securities and Exchange Commission (SEC) has filed more insider trading actions – 168 – than at any other three-year period in its history. The actions were filed against nearly 400 individuals or entities and the profits or losses involved totalled around $600m.
In its statement on the UBS fine, the FSA pointed to the Swiss bank’s computerised risk management system, which it said was not effective in controlling the risk of unauthorised trading. It also said its trade capture and processing systems had “significant deficiencies” that enabled Adoboli to conceal his unauthorised trading. “The system allowed trades to be booked to an internal counterparty without sufficient details, there were no effective methods in place to detect trades at material off-market prices and there was a lack of integration between systems,” stated the FSA in its ruling.
Regaining trust
In the wake of the global financial crisis and trading scandals, ensuring markets are fair and orderly has become a priority. Steve Leegood, an executive at market information company Bryok, says there is a perception among buyside firms that they are being “ripped off” by their sellside counterparties. “There is increasing recognition in the industry – by brokers and by exchanges – that integrity is a good thing,” he says. “Being able to demonstrate integrity is becoming a competitive weapon.” It is an expectation that if you run a tier one market you will have high quality supervision and be able to demonstrate that to regulators, says
Best Execution | Spring 2013
Mark Hemsley, chief executive of BATS Chi-X. “We believe surveillance is something to keep investing in and improving.” BATS Chi-X’s surveillance team uses a combination of in-house and third-party tools to monitor trading activity. The automated system includes real-time and T+1 alerting; cross-venue monitoring across displayed and non-displayed pools of liquidity; ad-hoc reporting; scalability with high message throughput; replay capabilities; and cross-market views. This push for integrity is not only being driven by financial regulators. Magnus Almqvist, senior product specialist at SunGard’s capital markets business, says buyside firms are taking a more active interest in how traders are executing their orders. Moreover, many buyside firms are now trading on their own account via direct market access. “Regulators are asking asset managers to monitor their own transactions for abuse and at the same time the customers of those asset managers are beginning to ask questions about surveillance.” While financial regulators in individual countries
are throwing their weight around, the European Securities and Market Authority (ESMA) has also weighed-in with guidelines on automated trading. The guidelines, which came into force in May 2012, apply to any firm that trades electronically or provides algorithms for others to access automated financial markets. “Whilst many market participants may feel they already have sufficient systems in place to address ESMA’s requirements for automated trading in equities, this is not true for all asset classes or all participants,” says Rebecca Healey, senior analyst at research firm Tabb Group. “Even for those who have solutions in place, existing systems risk becoming overwhelmed with the sheer volume and complexity of algorithms and requisite data. Necessary controls and procedures are fast proving inadequate ahead of the further legislation coming down the pipe.” Healey is the author of the March 2012 report, Market Surveillance in Europe: Under Starter’s Orders. In it she writes: “As the trend towards automated trading is set to continue, and asset classes are forced out of the opaque shadows of the OTC world onto exchanges, the need
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