Critical to any business is the effective use of trade surveillance. In August 2015, the Securities and Exchange Commission (SEC) found Citigroup guilty of not following procedures to detect security lapses in its use of public information. The financial giant was fined USD15m.
Trade surveillance effectively monitors company activity. It ensures a company is using the proper methods to avoid fraud and manipulation. It helps detect and prevent illegal and manipulative trading practices that could lead to fines and penalties.
What is effective trade surveillance?
Trade surveillance refers to implementing procedures to detect trade rule violations. The financial markets have seen significant restructuring in this regard in recent years.
The main themes have been control and oversight of regulating the markets since the financial recession in 2008, as banks and financial institutions have borne substantial losses due to rogue traders.
Thanks to the compliance process implemented by trade surveillance, rogue traders are caught instantly and insider trading activity detected before the damage is done. Rogue traders are traders who act independently but can cause significant financial loss to both the business and the client.
Such activity unsettles the entire market. Therefore, trade surveillance focuses on examining audit trails, order books, orders and trades, and analysing cross-market views. The system should also analyse areas such as trade violations and post-trade transactions, and conduct market surveillance. It is, however, mostly suspicious trades that are analysed.
How trade surveillance systems protect the markets from fraud
Trade surveillance systems protect the markets from fraud and rogue dealings that could damage a business’s reputation and cause substantial loss to the market.
The systems are designed to ensure the markets are more transparent and to increase investor confidence in markets. Regulators are also implementing new trade surveillance protocols to make sure internal controls are not breached, as this leads to illegal trading activity.
Preventative modelling offers transparency, efficiency and a clear image of the market. It mainly concentrates on streamlining internal business processes and implementing the following:
- Effective internet controls to make sure traders do not cross their boundaries
- A simple reporting structure able to generate standardised reports
- Efficient workflow management using a dashboard for customised summary reports
- Robust enhancement of the system to provide access to previous trading data.
- Powerful mechanisms to detect rogue trading and market manipulation
- Mandatory block leave to highlight trading irregularities during an off-season
- Alert procedures that reduce the number of false alerts
How a trade surveillance firm can help a business thrive
A seasoned trade surveillance firm can help a business thrive by providing it with a transcend strategy. Using this strategy, the business can implement pre-trade and post-trade surveillance systems.
The systems are designed based on the main aspects of data and issue detection, and to come up with solutions to address these issues. The right firm knows the significance of using a secure surveillance system that employs a statistical model to optimise and build scorecards and rules, and eliminate fraud.
Companies can now do the following:
- Customise the tools used for surveillance based on their own requirements
- Comply with regulatory reforms in their own country and globally
- Conduct analysis to identify high-risk areas
- Review alerts on market abuse
- Determine the data necessary for preparing the right format
Organisations must take the recommendations and protocols seriously, so that market participants could analyse trade and position details accurately. This would also help organisations detect behaviour that would otherwise severely affect their business. Seasoned surveillance firms know that the faster such problems are tracked, the faster solutions could be designed.
If solutions are implemented properly, organisations could avoid legal problems and severe penalties, and make profitable decisions.