Regulated persons are increasingly asked by regulators to demonstrate understanding of how technology use can impact markets and consumers.
Having a strong compliance culture and adequate oversight controls are vital elements in ensuring that firms are able to respond appropriately to cases of technological abuse or failure. Regulators have taken measures to adapt to market developments, and so they demand that industry participants do the same.
One area where regulators have indicated a particular focus is high-frequency trading. In the US, for example, the SEC has invested tens of millions of dollars in developing more sophisticated monitoring tools, such as the Market Information Data Analytics System (MIDAS) and National Exam Analytics Tool (NEAT), which are intended to accelerate their data processing capabilities by a substantial margin.
In a March 2013 report, the SFC sought to expand the definitions of all forms of electronic trading and placed a higher burden of due diligence and oversight on intermediaries. The intention was to
establish an inclusive, comprehensive framework under which trading technology providers would be forced to implement more advanced controls for detecting abusive activities.
At the start of 2014, the SFC introduced the new regime, which now requires policies, procedures and controls to ensure that their electronic trading activities do not pose undue risks to the market.
With the implementation of transaction reporting requirements in the UK, such as the Markets in Financial Instruments Directive (MiFID) and European Market Infrastructure Regulation (EMIR), the
FCA has made it clear to the industry that it will heavily monitor trading activity, particularly high-frequency and algorithmic approaches. Like the SEC, the FCA has committed substantial capital to develop its capability to review huge streams of reported data.
The FCA also recently licensed NASDAQ OMX’s SMARTS Integrity market surveillance platform to enhance its monitoring of transaction reports across the UK’s financial markets. The FCA is leveraging this scalable and extensible tool to augment its coverage of current and future European legislation. The regulator now has access to more comprehensive, timely alerts, and several investigations have been launched as a result of the platform’s effective use.
It is expected that regulators will subsequently be able to identify more candidates for examination and enhance scrutiny of priority infractions, such as insider trading and market manipulation.
In the wake of recent high-profile trading errors, regulators in the US, UK and Hong Kong will be honing in on technology reliant strategies by expanding oversight obligations of both traders and service providers and increasing accountability for misconduct.
