Buy-side firms are next to feel regulatory pressure for market surveillance, says b-next’s Martin Porter
Martin Porter, global sales director at b-next, says that buy side firms need to consider the implications of increasing regulatory scrutiny of markets.
Due to increasing pressure from regulators, financial market participants have a duty to ensure that their investment and trading divisions operate within the rules set out by national and EU wide regulation. Ensuring that anyone within the firm or its clients are not committing market abuse either through price manipulation in the market or insider dealing, is of paramount importance.
Traditional market abuse surveillance and monitoring has been carried out by sell-side firms for many years using either automated systems built in-house or supplied by vendors like b-next. Buy-side firms have typically not followed this trend believing that market abuse surveillance should be carried out elsewhere in the trading process. As buy-side trading has become increasingly sophisticated over recent years, with ever more complex asset classes and the use of algo and HFT trading, this trend looks to change.
High profile market abuse and insider dealing cases involving the buy-side have recently hit the headlines. Perhaps the most famous case is Raj Rajatarnam of the Galleon Group who was convicted and sentenced to 11 years imprisonment for conspiracy and securities fraud. In other cases, leading asset managers such as L&G and Schroders have moved quickly to dismiss those individuals alleged to have been involved with insider dealing. With reputational risk at stake, a zero tolerance approach is likely to be taken in this area, but this does require robust systems and procedures to be in place across the whole firm to detect any malpractice. Of course prevention is better than cure so capturing attempted abuse in its infancy and reporting it to the regulator should be best practice.
The rise in buy-side insider dealing cases demonstrates that there are a number of problems that need to be addressed. Buy-side firms must be able to monitor all trading activity across multiple trading systems. Automated systems that analyse data and information, and provide alerts of suspicious activity are one way to enable buy-side monitoring. Proving that market abuse occurred in order to seek a court conviction is also an issue.
The current regulatory situation requires that there must be proof that market abuse took place. New regulation expected under MiFID 2 that will lower the burden of proof and it will become an offence to ‘attempt’ to commit market abuse. This can act as a deterrent to would-be abusers or lead to more convictions. Either way, buy-side firms will need to be in a position to identify all forms of potential market abuse and have the means to investigate it. A comprehensive trade surveillance solution is the best way for them to achieve this.
b-next is a specialist provider of proven multi-venue, multi-asset class, Capital Markets Surveillance and Compliance software solutions to meet regulatory mandates, manage risk and drive trading efficiencies. The b-next Capital Markets Compliance (CMC) solution is a single integrated compliance platform for detection of Market Abuse, Insider Trading, Conflict of Interest, Derivatives/OTC Monitoring, Best Execution reporting and more. With over 150 customers, b-next has a 20 year history of delivering solutions to market participants, exchanges and regulators.