The type of trading behavior that can be categorized as manipulative or disruptive is generally not prescriptive in nature. This will likely continue despite requests for clarity across market participants.

Regulatory agencies are becoming much more aggressive in mitigating activity that can undermine confidence in the markets, placing additional responsibility on today’s compliance teams. As a result, new expectations for proactive trade surveillance are gaining increased attention, especially as companies also seek to eliminate breaches of internal controls and policies.

Organizations participating in energy and commodities trading have limited options for enhancing their trade monitoring and surveillance capabilities in an innovative and cost-effective way. They are often limited to software not quite geared to the proper range of asset classes in the space, or customized systems that can take significant time and cost to design and implement.

What they need is the ability to tap into a robust set of trade surveillance studies, applied to an extract of trade transactions, geared toward multiple assets including physical and financial commodities, equities and fixed-income asset classes.

This is essentially a “surveillance as a service” model that can develop both detailed and summary level reports identifying hot spots and specific events that require additional review. This approach provides evidence of electronic trade surveillance, which is strongly recommended by regulatory agencies.

Understanding where potential trouble spots exist is essential for effective trade monitoring and surveillance. Knowing high risk traders, assets and time frames that may coincide with external events, provide a wide range of coverage for the compliance team. Detailed reports can then provide specific characteristics of trade behavior for respective events.

Surveillance as a service leverages the fact that most trade behaviors of interest leave a distinctive footprint or signature within the trade transactions. These include single transactions of interest as well as events that are aggregate in nature involving multiple trades. Major categories must focus on price, volume, pattern shifts and non-economic activity, as well as address internal controls.

Finding the right resources and budget to support proactive trade surveillance is challenging. The surveillance as a service approach allows an organization to immediately improve posture with regulators through greater transparency while mitigating risk associated with undesirable trade practices. The service approach can quickly and efficiently provide organizations with prioritized insight and visibility into areas that necessitate compliance review. 

John Doran is principal at SunGard Global Services’ energy consulting business