Surveillance tech and managing expectations


Across the pond, quite a bit has been happening actually. As BroadPeak´s Vivek Pathak noted, new European market requirements are looming, forcing the hands of many market participants and technology providers, particularly in the surveillance area. Linking voice and e-coms and cross-market activity may be a regulatory white tower sort of demand in the US, but in Europe, it´s a different story, particularly when it comes to trade reconstruction and forensics.
Simon Richards, president of the US unit of Spain-based Fonetic, a voice and data surveillance and analytics firm, says that indeed, expectations are rising, from both regulators and users. “Early on in Dodd-Frank times, surveillance was always in the context of compliance, as a compliance driver. Then with MiFID II, you see it again as a compliance driver. But also during this period, we´ve seen hundreds of millions of dollars in fines (because of trader mischief). Now we hear about regulators talking to our customers and saying, “we´ll be back in six months and we want to see what you have put in place to better manage your trade floor.” We´ve seen a high-level increase in the surveillance need, and the surveillance driver, which I believe is to counteract the compliance need.”
He suggests thinking about compliance and surveillance as separate things, separate entities. “We´re seeing in the bigger organizations, both an upscale surveillance department and a compliance department. When we visit, we may have a discussion about how we might be compliant with Title VII or spoofing or MiFID II. And next, we will have a surveillance conversation which is more about how we can get on top of this (trader mischief), to get to the problem before we get fined by regulators,” he says.
We relayed a conversation to Richards that a trading firm shared with us. Regulators visited this particular US firm and were told that from “this day forward, you need to be able to do X, Y and Z, in terms of trade surveillance. When the compliance office pressed the regulator for more specificity in terms of the scope of what they needed to look for, the answer was vague. In a nutshell, regulators told the compliance officer to “do more, do better.”
“I have heard this. You´re asked for a piece of string, but not told how long it should be. Are you looking for spoofing? Are you looking for other market abuse? And how do you define it?” Hmm. Sounds like a trend to us.
Richards notes that right now there are several fairly well-subscribed systems out there, front office systems like Actimize and SMARTS (Nasdaq) or Ancoa, high-end surveillance alert systems.
“These alert systems are constantly being tweaked (as rules and regulatory demands change), and as result, compliance offices are seeing huge volumes of these trade alerts. So, come capital market customers, from a resources standpoint, are now having to outsource to places like India or Ukraine, this vast quantity of alerts, just to ascertain if they are false positives. So, these companies are seeing a huge uplift in costs to manage these false positives.”
Richards says this the big advantage of his firm´s ATR system – it allows trading companies to eliminate the false positive alerts almost from the get-go. “if, for example, our voice surveillance system is connected to all your e-comms and say, SMARTS or Actimize, the compliance officer will receive the alert, he pulls the ticket and attaches to it. He may see 12 emails, three IMs and six phone calls. He can actually assess all of it at one time and make a determination almost immediately. Without a solution like ours, the alerts are sent away and it will be days before you learn if an alert is a false positive or it requires more attention.”
So, we checked. There are few if any companies out there who promise similar voice data surveillance capabilities. And fewer still who offer such services plus the capability to bridge the surveillance gaps across markets, products and asset classes. Yet this seems to be the latest expectation of regulators, according to comments we heard at the recent spoofing forum we hosted.
“Generally speaking, the e-comms side of surveillance is where most people have focused and for good reason … because it´s all written down. But the truth is, the big bad ugly side of this, that few have tried to take on is the voice side, which is usually where the misbehavior takes place,” Richards says.
He offered a story about a new customer, an energy company actually, who had a regulator visit last year. The company was asked to present its trade surveillance capabilities, which seemed to pass muster, until the question was asked, “What about voice?” The company had nothing in terms of voice surveillance, only voice storage, and was told it had one year to cover that base or face fines for noncompliance.
He says that particular customer went through 20 vendors to find the right solution for voice surveillance and he´s heard that some banks say they assessed up to 40 vendors for this kind of technology. “This takes a huge amount of time. Most companies we speak to have some form of trade (data) surveillance in place and some sort of voice comms storage, but not voice surveillance and few have any sort of solution that brings these surveillance and compliance functions together. This is actually a new category that´s being established now in our sector that´s called holistic surveillance,” Richards says.
He describes the situation now for many big companies – particularly in Europe – as a “mad scramble” to bring it all together, and that regulators don´t seem too terribly sympathetic to the complexities and costs involved in establishing the correct internal capabilities to meet the necessary surveillance and compliance requirements. And what of mid-sized companies? He says interest from this level of company “is beginning to cascade.” He says that interest has begun in earnest from what he describes as “tier 3 companies,” or rather large energy firms, funds and the broker-dealer market, the buy side.
He says that for these smaller, tier 3 companies, his firm and others are now moving toward more aggressively priced, subscription and cloud—based surveillance and trade reconstruction services. Fonetic should deliver such an offering by Q2 2017 he says. For more information, go to

The Risk Desk, Oct 28 2016, Vol15 Issue 20