Robot Cops and the World of Tomorrow

Technology is creeping into buy-side compliance processes, but to what degree?

james-rundle-waters

It's easy to talk about compliance, but it's a lot harder to actually comply, even if your job depends on it.

Most things in finance come down to dollars and cents, even in technology—or perhaps especially in technology. How much return will there be on the investment into this all-singing, all-dancing data system? How much will this shiny new trading system affect my profit-and-loss statement?

I’ve always found that applying this perspective to compliance is a strange way of looking at things because the answer seems obvious. How much will investing in my compliance and surveillance save me? If recent history is any measure: millions of dollars in fines, the cost of hiring outside consultants to improve your processes, and hey, maybe some jail time.

Some sell-side firms seem to treat regulatory fines as a cost center, but that’s not really something that even the largest buy-side firms can do, so it’s perhaps no surprise that they’re turning to technology to help with the burden.

On a pure compliance basis, this could simply be platforms designed to help track and manage regulatory change as it pertains to the firm. Some of the larger vendors, in particular, those with a legal pedigree, have had this technology for some time. Others are entering the field—my colleague Aggelos had a story this week on Wayfinder using artificial intelligence (AI) to remove highlighters and printed reams of regulatory ink from the compliance process, for instance.

On the surveillance side, the technology equation becomes even more important, particularly as regulators sharpen their focus on how the buy side manages its trading activity.

As an example, a study from Nasdaq and Aite Group published today found that 64 percent of respondents expected to spend at least some of their compliance budget on surveillance technology over the next 12 months, mostly through third-party implementations rather than in-house builds.

We’ve also reported extensively on how firms are looking at new ways of presenting data to detect market abuse, and exploring other applications of AI, machine learning, cognitive computing and other areas to more effectively monitor their employees (see the section titled “Further Reading” at the bottom of this page for more).

The same Nasdaq/Aite Group survey found that 72 percent of a wider sample set, which includes sell-side firms, used automated processes and “specialized” technology in trade surveillance, 48 percent in trade supervision, and 44 percent in employee or personal trade compliance, although the authors admitted that the sophistication and completeness of these systems was “unclear.”

But what came out of the buy-side interviewees in the report was particularly interesting. Surveillance for these respondents, which ranged from small to large buy-side firms, wasn’t just focused on basic levels of monitoring but was also concerned with market manipulation, trading at the close and more detailed forms of abuse than has been the case in the past.

Technology, of course, will enable this in the future. Whether the robots become the cops eventually, though, is a question for the world of tomorrow.

This week on Buy-Side Technology:

  • Another week, another Markets in Financial Instruments Review (Mifid II) release. IHS Markit put out its new platform for managing research payment accounts.
  • Tradeweb had an interesting first this week, being the first foreign platform to connect to China’s Bond Connect program. Whether it fares better than Stock Connect is another story.
  • The Financial Conduct Authority met up with the UK’s asset management industry this week. Everyone had a big laugh about extraordinary fees and admired its chutzpah, and then the regulator stopped laughing. It set its pint down slowly, and gradually, the rest of the table fell silent. By the end of the night, the buy side had been thoroughly slapped on the wrist and the consultants sent to the Competition and Markets Authority with no supper. But tech can help, tech vendors claim.
  • Likewise, the Financial Stability Board had a date with the fintech industry, but even though the evening was kind of fine, everyone left a little wary of each other in separate cabs.
  • Meanwhile, Citi rolled out Velocity Clarity, which has the dubious honor of sounding like a speedometer but actually does a lot of stuff with big data lakes and dashboards.
  • My colleague Anthony and I spoke with Michael Radziemski, formerly of Lord Abbett, about all things tech. He is sagacious in such matters, and it’s worth asking him about his golf stories if you get the chance.

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