With regulatory reform on the horizon on both sides of the Atlantic, brokers across the US and Europe are set to spend over $200 million on new market surveillance programs this year, according to research from Tabb Group.
The financial services industry faces an overhaul under the Dodd-Frank ACT in the US and MiFID II in Europe. To comply, brokers will fork out $206 million on market surveillance in 2011 and - with hundreds of laws yet to be written and rules to be implemented - spending will grow at a CAGR of 14% to $268 million in 2013.
In addition, tight budgets and short timelines will lead brokers to increase their reliance on outside vendors, with spending on external systems expected to grow from 28% in 2011 to 35% of total expenditure in 2013.
The report's author, Miranda Mizen, says that changes to market structure and new regulations mean conventional techniques need to be thrown out in favour of surveillance programs that match the markets' dynamism.
"It falls on the brokers as the primary intermediary between investors and exchanges to assist regulators in making sure that market surveillance catches up to the real-time dynamics of the market," she argues.
To meet the onslaught of new requirements and regulations, Tabb says brokers are faced now with three gargantuan challenges: collecting, collating, analysing, storing and retrieving data; ensuring practices and procedures prove their processes are robust and defensible; and expanding the list of details they need to watch for.
By focusing on three key components of market surveillance - detection, prevention and deterrence - Mizen contends that brokers can gain real-time and historical analysis and oversight to detect anomalies; controls and processes to prevent errant order flow from reaching the markets by applying broker-owned risk controls; and real-time monitoring, control and, acting as deterrents, heavy penalties.
Mizen concludes: "Different from the past, brokers are now facing serious regulatory changes across the US and European markets, with Asia not far behind. This time it's a major overhaul and because surveillance is critical, it is in the spotlight."