Smarts Group, the global leader in market surveillance systems, recently launched a new Layering Alert for its broker product, Smarts.broker.
The new alert which is now standard with SMARTS.broker is designed to capture layering of the order book and spoofing.
Layering and spoofing are manipulative devices where orders are placed close to the best buy/sell price with no intention to trade in an effort to increase the perceived liquidity of a security.
"Layering the order book is an issue that exchanges and regulators are focusing on and take very seriously," said Mr Andreas Ruf, Executive General Manager, SMARTS Broker Compliance. "Broking firms need to be conscious of the implications of layering the order book on the integrity of the market and be diligent in their surveillance of this potentially harmful activity."
To highlight the increased attention on layering and spoofing Mr Ruf points to UK regulator FSA's regular newsletter Market Watch1 (issue 33). The newsletter emphasised layering as a trading strategy that the FSA views with concern, particularly the use of this trading device by clients with direct market access (DMA). The FSA in the Market Watch article advised readers that "where there are circumstances to suggest that abusive conduct has taken place in the order book, we will consider taking action against the individual or firm involved in the trading."
In response to the increased scrutiny, SMARTS has designed and implemented an alert for brokers which clearly identifies layering scenarios. The alert identifies where a client or trader layers the order book on one side of the market, commences the execution of trades on the opposite side of the market, and soon after removes the 'layered' orders from the order book. During the testing phase, the new alert has proven to consistently identify patterns of trading which are consistent with this potential market abuse.
"As part of the SMARTS.broker service SMARTS responds to new regulatory requirements by developing alerts and front end functionality that capture trading activity targeted by the regulator. In this way, compliance functions can identify and prevent trading patterns from developing that could put the firm at substantial financial and regulatory risk," said Michael O'Brien, Head of Product Management and Client Services for SMARTS Broker Compliance. "As with all new alerts, it has been implemented for all our broker clients across all markets at no additional cost."