Market Surveillance Special Report

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Keeping Tabs

Financial markets simply can't function without effective oversight. It's a lesson that's been learned time and time again over the years, a history littered with scandals, trade errors, large-scale collapses and small-scale tragedies. Competent firms encourage a culture of compliance, yes, but the truly responsible encourage a culture of oversight, checks and balances, too.

While most firms have a view into what their activity is in the markets, some asset classes have started to wake up to the need for overseers. Foreign exchange (FX), traditionally a so-called "unregulated" market, has been battered by its fair share of problems lately, but one benefit of these has been to focus the minds of the largest banks on how to adequately perform a surveillance function in a decentralized environment. The resulting collaboration has been exciting, and in many ways it's been encouraging to witness as a real example of how working together can empower the market.

What's clear more than ever, though, is the central role that technology now plays in any effective regime. The move to electronic trading in many instruments has brought with it the ability to put in automated functionality for monitoring activity, yes, but with the same benefit comes an imperative to ensure that a sophisticated infrastructure exists to handle electronic flow. Using complex-event-processing engines is just the start, and a wider rollout of advanced tools, adaptive rule sets, and wider mechanics for case investigation and other areas, are rapidly becoming obligatory for many trading operations.

Technology is a central part, then, but it is only one aspect of surveillance. Education, as always, becomes critical to prevent compliance failures, and a skilled workforce that understands and implements the rules they have to abide by in their day-to-day lives is one that will be able to navigate markets safely and profitably. You only need to look at the startling transcripts of FX multi-dealer chat rooms to understand that, while some bad eggs with questionable attitudes do exist, on the whole many are simply behaving as if their rigging of the market is business as usual. Banning environments such as these chat rooms is a knee-jerk response and is akin to shutting the stable door after the horse has bolted. Proper surveillance programs - technological and educational - to detect and handle these problems before they can affect the wider firm are the real answer.

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