Key Takeaways from 1LoD’s Trade Surveillance Deep Dive Report 2021

Industry analyst 1LoD recently hosted a two-day Deep Dive on the future of trade surveillance. Attendees were from all over the globe and represented financial institutions (78%), technology firms (19%), and regulators (2%). ACA’s Michael Lehman, Partner and product manager for ACA’s Market Abuse Surveillance technology in ComplianceAlpha^®, spoke at the event. 

Below are some key takeaways from the post-event report published by 1LoD. We recommend checking out the full report to get a sense for what your peers are doing, what regulators expect, how your firm compares, and what you might need to do to strengthen your firm’s surveillance program. 

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• Regulatory focus areas: Regulators have their sights on how retail investors and social media/market influencers are impacting the trading ecosystem as well as the increased risk of misconduct and market manipulation they present. These concerns have prompted regulators, including the Investment Industry Regulatory Organization of Canada (IIROC), to adopt a more holistic approach to trading supervision. 
• Technology trends: As trade surveillance programs become smarter and more sophisticated, firms are most concerned about managing false positives while also upgrading their systems and technologies to streamline workflows and manage risk more effectively.  
• Surveillance teams and expertise: With regulators adopting sophisticated technology like artificial intelligence (AI) and machine learning (ML), surveillance professionals are questioning how much technology expertise they themselves need to meet regulatory expectations – and whether this expectation is reasonable. 
• Individual trader profiling: The increasing amount of employee data being captured and ingested by surveillance systems has raised concerns around ethics, privacy, and security. However, this information is key to developing a truly risk-based approach to surveillance and reducing false positives, according to Lehman: “We start by identifying the risks or different types of market abuse that are relevant to the specific firm. Then, given those scenarios, we are essentially looking for anomalous trading activity related to the specific risk profile. So, if we can add a base line assessment of the trader to existing metrics, we can potentially narrow down the range of transactions that we should be investigating. Utilizing hard thresholds, like size of trade or return of security, can cause multiple false positives. Developing multi-step parameters built into algorithms would be the preferred approach. That gives the system the flexibility to work over many distinct asset classes and/or portfolio managers with multiple sets of parameters. Including further datasets depicting a trader’s behavior will increase the validity of the system and the breadth of surveillance.” 
• Trade data analysis: Some firms have invested or are starting to invest in building systems that can apply vast amounts of trade data and sophisticated surveillance models to spot emerging sources of market misconduct such as cross-market manipulation. This expansion beyond traditional surveillance techniques is another area that may impact the type of skills and expertise required of surveillance teams in the future. 

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We offer a range of trade and market abuse surveillance solutions designed to help manage your firm’s trading risk in a way that meets regulatory expectations and industry best practices. To learn more, contact your ACA consultant or complete our contact form below. 

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