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From ESMA guidelines to prevent market abuse, to recent MiFID II amendments, European regulators are forcing a change in direction in the use of market surveillance systems amidst increased market fragmentation that has increased the difficulty in spotting market manipulation across Europe’s trading venues.
According to new research announced today by TABB Group, spending for market surveillance programmes covering equities and derivatives trading alone across Europe will grow by at least 8% in 2012, increasing from €105 million in 2011 to €126 million by 2014.
With the increased fragmentation of European trading venues and high-frequency trading now accounting for nearly 40% of equity order flow, the ESMA guidelines recently announced have been put in place ahead of the MiFID review covering the shift to automated trading in different asset classes and geographies, says Rebecca Healey, a TABB senior analyst in London and author of the new report, “European Market Surveillance 2012: Under Starters’ Orders.” Whilst many market participants across Europe may feel they have sufficient surveillance systems in place to address ESMA’s requirements, she points out, this is not true for all asset classes or firms.
Even for firms with surveillance solutions in place, Healey explains their legacy systems run the risk of being overwhelmed by the sheer volume and complexity of algorithms and data volumes. “The growth of correlated trading makes one-dimensional surveillance redundant. ESMA guidelines call for monitoring cross-border trading in real time, not post trade. Unfortunately, necessary controls and procedures may prove inadequate ahead of further regulation coming down the pipe,” she says. “As such, investment firms need to appear beyond reproach, uphold market integrity and avoid fines. This is why reputational risk has quickly become the mantra of compliance officers and risk managers alike.”
However, a one-size-fits-all prescriptive approach to systems and controls will not allow these firms to adopt appropriate governance controls for their differing businesses. Instead, flexible, adaptable systems are needed that can “slip in amongst the cogs and join up the dots to regulators’ satisfaction.” According to Healey, market surveillance systems incorporated into automated trading will create the ultimate execution performance algorithms that can act decisively, rather than merely fishing for flow and leaking critical market intelligence. “As venue analysis and smart-order routers lead the way to improved execution performance, advancements in monitoring predictive behaviour to source quality liquidity will be welcomed by both the buy side and sell side.”
The usage of surveillance systems to collate, analyse, monitor and report on risk is on the rise, she says, with the latest tools and technology not only providing detection, deterrence and prevention, but delivering operational efficiencies that are creating new commercial opportunities for differentiation. “Regulations from Brussels may be the trigger, but market surveillance is now morphing into optimal operation control. Despite current budget constraints, firms are beginning to invest in the necessary tools, but those who don’t may well be saddled with fines and a damaged reputation.”
The 26-page report with 12 exhibits is available for download by TABB Group Research Alliance Equity clients and pre-qualified media at https://www.tabbgroup.com/Login.aspx. For an executive summary or to purchase the report, visit http://www.tabbgroup.com or write to info@tabbgroup.com.
