Market surveillance: From cost to value creation.

Stefan Hendrickx, CEO ANCOA, end-to-end integrity.

As a market surveillance company we are seeing a real transformation in investment banks’ attitude and approach to surveillance and compliance.  The majority of banks we converse with are investing substantially in new surveillance technology. Achieving compliance with changing regulations will remain at the top of the agenda in 2014.

Surveillance officers are looking to move away from a ‘tick the box’ approach in surveillance to a more holistic approach, seeking to avoid a wider range of risks by deploying the latest techniques in analytics, big data and visualisation. Surveillance is finally catching up with the technological revolution that, on the trading side, has taken place in the past ten years.

One structural change is the adoption of real-time monitoring which is in part driven by regulation, but also because it simply makes business sense. Real-time monitoring instead of end of day, offers better protection against reputational damage as well as against erroneous trading (both human and algorithmic).

From Ancoa’s point of view this structural change towards real-time market surveillance is a great opportunity to create substantial value for those who have the vision to go beyond merely complying. The infrastructure needed for real-time monitoring offers new possibilities to monitor execution consistency and gather insight on performance versus competitors.

Big data and cross-source visibility

2013 was a bleak year for banks in terms of penalties for a variety of issues including FX rate manipulation, Libor manipulation, rogue trading, and insider dealing – all of which have persuaded compliance officers to rethink their approaches in novel ways.

Regulators have been facing large challenges of their own, not in the least their staff being hired en masse by the banks. We found that they worry about the same practical challenges, which if unaddressed lead to low conviction rates and a real struggle to do as much as possible with the staff available.

Both regulators and banks are trying to get a grip on the massive amounts of data they have to sift through to find valuable information. In principle, the institutions have access to all the data they would ever need to spot fraud, but the data is spread around many, often incompatible, systems. To a great extent this situation originated from a ‘silo approach’ in financial institutions, which today results in blind spots for compliance officers. Connecting the dots and understanding how a transaction comes into existence is simply impractical.

For every transaction, traders use a variety of channels; internal chat boxes, Bloomberg, phone conversations, e-mail, etc. Rebuilding the audit trail and manually browsing through a vast number of communication channels is hard enough as it stands. Tracking all of this information and spotting abuse against the wider external context is a process that still involves tedious manual steps. This makes internal investigations slow and error prone. The wider external context consists of voluminous market data, reference data, financial newswires and even social media channels like Twitter. Unless a fully automated workflow is in place with powerful analytics and visualisation capabilities, manual bottlenecks make for a flawed and expensive operation.

The realisation of the benefits of contextual surveillance by our clients means that they are currently looking to deploy cross-silo monitoring and risk solutions, providing visibility across the organisation, at the regional, or ideally, global level, combining a wide range of structured and unstructured data.

Our company focuses 100% on this space through its Ancoa platform which offers a real-time solution built on big fast data technology. The platform provides the building blocks to deploy real-time insight through data normalisation, alerting, reporting, circuit breakers, monitoring, archiving, and generating a complete audit trail within a single environment, offering maximum context.

The investment in such a platform, a golden copy of compliance data, generates new and unforeseen opportunities to analyse execution practises, market quality, and execution consistency.

A holistic approach to market abuse, AML and business intelligence

A recent trend, which initially surprised us, was to find anti-money laundering (AML) staff joining our meetings about market surveillance. We found the thinking has very much moved away from treating different types of financial crime in isolation. We see a clear evolution in thinking towards a holistic approach of fraud and market abuse in general, including securities fraud and money laundering. Of course, this has an impact on the demand for surveillance technology.

The areas of particular interest to AML staff in Ancoa’s platform are the capability to spot complex patterns of behaviour, and visualise large datasets through network graphs (see image below). The second part that is appealing to them is the capability to overlay multiple streams of information on a single timeline and look for patterns across all of these streams simultaneously. In the past streams of information were often considered one by one, and additional sources would be consulted once something suspicious had been found. This leads inevitably to false negatives. Cross-referencing the available streams of information gives a far better chance of spotting suspicious behaviour and links between trades, news, emails and chat sessions.

Fig 1: AncoaSuite – NetworkView

Fig 2: AncoaSuite – Tradeview

The image shows trades, buying & selling orders along with news & alerts, displaying the effect of Warren Buffet’s investment of $5billion on Goldman Sachs stock on 23 September 2008.  ©Ancoa Software 2014

Having invested in all of this infrastructure to enable a single golden copy of information that is easily accessible, from a range of applications, to perform analytics upon, the question that arises is “what additional value can be extracted?”. It turns out that a wide range of high level, business intelligence questions can be asked efficiently from this information store. A few examples are:

• Does my client get a consistent execution quality over time?
• Does my client get a fair deal compared to his peers?
• How can I improve execution quality across multiple clients?

Queries that would be notoriously difficult to achieve with old school technology, can now be answered in seconds, using big fast data technology.

To illustrate the close relationship between best execution and compliance: when a client gets a deal that is too good to be true (e.g. in an OTC FX transaction), one might ask why, and an alert will be generated. Naturally the best execution metrics need to be calculated on the fly for all trades which makes future lookup particularly efficient.

We believe we are only seeing the beginning of a more integrated approach towards surveillance and business intelligence, which for those who are willing to invest, will result in a competitive edge, and additional revenue through the insight, provided both on the financial crime side as well as on the front office execution side.

ancoa.com