In today financial markets, compliance officers face a haystack of digital information to sift through, for the needles that indicate market abuse or misbehaviour. The question is, how to find those needles amongst all the hay of normal market activity?
Malicious behaviour can in fact be weeded out when the activity surrounding the placement and execution of orders displays a pattern recognised as abusive. However, identifying those patterns is no small task.
Under the MiFID II rules, effective since 3rd January 2018, all communications that support the processing of order management and investment decision-making must be captured for the express purpose of understanding how and why decisions were made, regardless
of whether those communications actually resulted in a trade. There are three operational hurdles that have to be overcome in order to capture this information and render it useful for compliance purposes.
Capturing all the data
The first hurdle is to bring all associated communications into scope, across both approved and non-approved channels. As technology is constantly evolving – particularly in the communications and social media sphere – firms must acknowledge that traders,
investment managers and investment advisors can use multiple routes to interact with other market participants, counterparties, clients and internal staff. These channels may not have been defined in the rules previously, but are certainly in scope for the
If there is a gap in data capture, the firm may find it has missed activity which has been deliberately designed to bypass the compliance checks, leaving the business open to punitive action.
Aggregating and standardising the data
The second challenge is to recognise that each communication channel may provide data in a different format, all of which will need to be aggregated and standardised in order to be assessed effectively. Voice, text, email and a variety of messaging models
must be brought together, whether they are internally managed (such as email) or externally managed (such as Bloomberg Messenger, for example).
From a technology perspective, firms will benefit from a centralised system that can interface in a flexible way with a broad range of technologies and take a holistic approach to data management, i.e. an approach where all types of data can be structured,
categorised and/or correlated in a way that makes it accessible and meaningful to a variety of management, compliance and IT functions.
Despite the technical challenges posed, the firm will still be liable for abuse if data has been misinterpreted.
Understanding the data
The third challenge is to identify patterns of abuse and discern them from non-abusive activity. Just as communications channels are multiplying, changing market structure - including new venues, new asset classes and associated trading practices - can create
fresh potential for gaming and other malicious activity. That can make the role of the compliance team especially hard.
Bringing it all together
MiFID II formalises rules for an enormously complex set of market structures in a legal framework, and to comply requires a platform that can gather and interpret communications that sit behind these markets, in order to store, manage, and analyse all relevant
data, to easily pick out the ‘needles’ and reconstruct the trading activities under question.
Complying and investing in technology to support this must now be an essential part of a firm’s strategy. The temptation to solve smaller problems, as they occur, will create gaps both in interpreting data and understanding patterns of behaviour, all of
which significantly increase risks of non-compliance.
However, with the right kind of technology, a firm not only supports its compliance requirements, but also enables ongoing business and efficiency benefits, such as drawing on eComms data to facilitate areas such as Best Execution.