Market surveillance systems are the latest thing attracting the
attention of chief technology officers at financial firms. And
small wonder. Two years ago Société
Générale was nearly laid low by
Jérôme Kerviel’s unauthorised trades,
and regulators in every major centre are clamping down on
Over the last year the UK’s Financial Services
Authority has levied £83.9m of fines on companies for
regulatory breaches. Not all of this is due to trading
infractions, but when you consider that only £7.4m of
fines were levied in 2002, the trend is clear.
Giles Nelson, deputy chief technology officer at Progress
Software (pictured), points to the financial crisis and the
flash crash as two reasons for the keen focus on trading
"Regulators are baring their teeth a bit more," he says. "For
example, the FSA has informed brokers in the UK, you need to
start showing us your internal processes to ensure that you
know what is going on – you can observe your own order
flow, your prop flow but also the flow coming in for your
clients as well and you need to show us what you have in place
to do that. The regulators are becoming a bit more
In Germany, too, there is a growing market for surveillance
systems according to Wolfgang Fabisch, CEO of b-next, which
supplies monitoring technology to the regulator,
In fact, technology vendors have seen the demand for market
surveillance and supervision systems mushroom, all over the
world. A clear signal of this is the pace of dealmaking in the
sector. Nasdaq OMX, for example, agreed in July to buy Smarts,
the Australian market surveillance software
The purpose of a market surveillance system is to detect market
manipulation, insider dealing, fraudulent or unauthorised
trading, and other offences, which may be punishable by fines,
imprisonment or bans from the market.
The job gets harder
Far from such abuses becoming less of a problem as markets
develop, the policing job is getting much bigger and more
As Rik Turner, senior analyst at research consultancy Ovum in
London, points out, one of the main drivers in the evolution of
technology is "to do more in less time". More good –
but potentially also more evil.
"Market surveillance has to keep up with faster matching
engines and greater order volumes," Turner explains. "With
matching engines forging ahead in reducing their latency and
upping their throughput capabilities, market surveillance
systems face the challenge of keeping up and correlating
information across multiple assets and potentially from
multiple venues to detect suspicious activity."
And not only does faster trading make it harder to spot abuses
– it also creates conditions where new kinds of shady
trading can occur. The rise of high frequency trading (HFT) is
changing markets in ways that honest commentators have to admit
they only barely understand.
Bart Chilton, commissioner at the US Commodity Futures Trading
Commission, called in a September article
for regulators around the world to develop new rules to
curb the influence of HFT firms in any subsequent market crash
(see page 10).
He stressed that in the past,
regulators did not have the technological ability to keep up
with algorithmic traders, but said that now had to change.
Fortunately, it is already
changing. Graham Jordi (pictured), executive general manager of
Smarts in Sydney, says that regulations vary greatly from
country to country, but that exchanges have the choice whether
or not to use a surveillance system.
More and more exchanges are opting
to do so – and many are upgrading their existing
systems and bringing technology in house.
Jordi says one of the main reasons
why Nasdaq OMX bought his company is that its technology
complements the exchange’s. Such deals by
exchanges are a logical move, adds Jordi.
The company's two main products are Smarts Onsite and Smarts
Online, as well as Smarts Broker, used by over 50 brokers
The Australian Securities and Investment Commission implemented
a Smarts market surveillance system earlier this year, and in
he Intercontinental Exchange made the same choice, becoming the
firm’s biggest derivatives exchange
Ice is using the Smarts Integrity Platform alongside its own
existing market monitoring activities, across its futures
Jordi gives three reasons why the demand for market
surveillance systems has grown. "Volume is one of the key
factors," he says. "As more and more electronic trading takes
place, it gets harder and harder to use other mechanisms to
keep track of what is going on. Complexity is another factor,
and understanding the role of surveillance. When we started out
in the ’90s there were a few takers. Largely the
view was, with exchanges and regulators – this is not
really necessary. With time and the occasional crisis or crash,
there has been more attention."
One way in which understanding has broadened, Jordi argues, is
that exchanges have come to realise surveillance technology can
be deployed not just to meet compliance obligations but also to
serve other internal business needs.
merging player in this field is the Sri Lanka-headquartered
technology vendor, MillenniumIT, recently bought by the London
MillenniumIT’s surveillance system is used by a
derivatives exchange in India, the Indian Commodity Exchange,
and it has struck a deal with the
Egyptian Stock Exchange, which is installing the trading
Fuard Ahamed, vice-president of product management for
surveillance at MillenniumIT in Sri Lanka, says: "We will
complete the deployment at the Egyptian Stock Exchange and the
Securities and Exchange Commission of Sri Lanka by October this
year and a new commodity derivatives exchange in India by
December this year."
MillenniumIT’s system seeks out manipulative
trading behaviour in real time. Through the
company’s Business Innovation Dynamically
technology, Ahamed explains, users can modify or create
additional alerts to extend the system with minimal assistance
The system’s latest offering includes a 'market
replay’ component, allowing investigators to go
back in time to reconstruct trading events as they
An experienced surveillance supplier is
Progress Software, which provides the system used by the UK
Financial Services Authority.
Progress’s Giles Nelson confirms that appetite for
such systems has increased rapidly in the past few
The market surveillance technology Progress offers is built on
its Apama offering. "The new release is an evolution of that
system," says Nelson. "We are calling this 'responsive process
management’. As well as being able to spot the
market abuse types such as front running, you can then do case
management as well."
Progress’s system is designed to help firms spot
market abuse types, handle each case, document it all and track
how the process is operating.
Never stand still
The importance of market surveillance is highlighted by the
attention it is getting from big, diversified software
companies such as 3i Infotech.
"Market surveillance has become one of the primary drivers for
you to expand your market, especially in the emerging markets,"
says Bharat SV, who heads business development for western
Europe at 3i Infotech in London.
But 3i Infotech is no newcomer to the product. Back in the
1990s, one of its earlier customers was the Bombay Stock
Exchange, which later white-labelled the technology.
The Indian regulators, Bharat recalls, had come up with very
strict requirements so there was a need for a very flexible and
powerful transaction monitoring tool. That was the birth of the
company’s system AWCS.
That need to be responsive to regulators’ specific
needs – which may change rapidly – is as
important today as ever, Bharat emphasises.
"You would have to be absolutely to the minute in terms of
meeting the regulatory requirements – otherwise the
regulator would not give you additional positions to launch new
products," he says.
Such responsiveness may be one reason why 3i
Infotech’s system recently went live at the Zagreb
Another Balkan exchange, that of Athens, is said to have
shortlisted Smarts, but is still considering building a system
Little by little, surveillance systems are covering the