When it comes to surveillance, the king of the hill on the sell side has, for many years, been Nasdaq. Of late, the US exchange operator has made significant efforts to extend its Smarts platform to the buy side, and this year it returns to the Buy-Side Technology Awards winners’ circle thanks to its Buy-side Compliance (NBSC) offering.
While Smarts is a world-class platform in its own right, what has really set Nasdaq apart in recent months has been its incorporation of behavioral models. The roots of NBSC are actually in Compass, the platform formerly offered by London-headquartered artificial intelligence and behavioral science specialists Sybenetix, which Nasdaq acquired in September 2017.
Just over a year since that acquisition, the integration efforts are bearing fruit. NBSC isn’t just a standard surveillance platform that checks whether trading patterns of portfolio managers fit the typical definition of layering, spoofing or other forms of market abuse, it also drills down into the individual traits of the trader, identifying when behavior is outside of the norm, and applies advanced analytics to detect the true nature of intent in trading.
All of this couldn’t come at a more opportune time for buy-side firms. Having long been largely left alone by regulators, rules including the revised Markets in Financial Instruments Directive (Mifid II) and the Market Abuse Regulation among others, along with enhanced conduct monitoring from government institutions, are placing more scrutiny on asset managers and hedge funds than ever before. Therefore, simply having a process that ticks a box and attests that, yes, this firm tries not to engage in spoofing, layering or wash trades simply doesn’t, well, wash. But not anymore. With NBSC, Nasdaq is taking surveillance to the next level.
“We focus on solving problems using new technology instead of the other way,” says Valerie Bannert-Thurner, head of risk and surveillance solutions, in Nasdaq’s Market Technology business. “But obviously adoption of some of these new capabilities is something we are pushing rapidly from an innovation perspective.”
These capabilities are already resulting in the production of suspicious activity reports, Bannert-Thurner says, and are reducing false positives by providing a more “holistic” view of surveillance that doesn’t simply rely on pre-programmed alerts. Instead, the AI—for which Nasdaq also won a category in this year’s Buy-Side Technology Awards—is paying dividends and putting sophisticated monitoring technology in the hands of buy-side professionals, often for the first time.
Bloomberg’s Gerard Francis looks at the challenges that capital markets firms face when trying to incorporate alternative datasets.Subscribe to Weekly Wrap emails