Banks’ multiple tech systems hinder market and trade surveillance

By Puja Sharma

The findings come as the potential for market abuse continues to accelerate globally as financial institutions continue to adjust to the new hybrid working world. Figures from Refinitiv show that just under 6% of suspicious transactions set off alerts among investors last year.

Having numerous technology systems scattered across the business is the biggest obstacle to financial institutions achieving strong market and trade surveillance this year, according to research from VoxSmart.

A poll of just under 80 market participants (79), including investment banks, brokers, and investment managers, found that 69% of firms believe having siloed surveillance systems increases the risk of market abuse being carried out. Just 18% of firms said replacing legacy systems was a barrier, while a mere 13% claimed to track trader chat through multiple channels, such as WhatsApp and Telegram, would prove to be barriers to stronger surveillance.

The findings come as the potential for market abuse continues to accelerate globally as financial institutions continue to adjust to the new hybrid working world. Figures from Refinitiv show that just under 6% of suspicious transactions set off alerts among investors last year.

With more than £2t passing through legacy banks every day, many banking legacy systems have been in operation for more than 30 years. The risk and complexity of changing these systems are understandable when so much money depends on them. As with every change, there is a risk of introducing defects and vulnerabilities, so many banks have taken a risk-averse.

Similarly, for much of the late 20th century, payments, retail, and commercial banking were not considered the most attractive parts of financial services and, as a result, did not receive much attention from senior management. Nevertheless, changes in consumer preferences – first the internet and then mobile – made banks rethink how to make their services compatible with the digital world. Despite this, banks layered modern front-end technology onto legacy systems to provide existing products through these new channels with little change. There were essentially the same services underneath, with little, if any, innovation.

It is clear that regulatory requirements have multiplied and diversified, with more firms expected to monitor and report market abuse across more markets and jurisdictions, at a faster pace, than ever before. As regulators increasingly require market participants to act as their eyes and ears in the market – sanctioning any firms that fail to report misconduct uncovered years later in markets in which they were active – no firm can afford to ignore trade surveillance.

The firms must instead always be aware of the risks they face; both aware of existing practices of market abuse as well as alert to the threats that emerge in the future. Market participants will need to harness technological innovation – artificial intelligence (AI) and machine learning (ML) in particular – to integrate vigilance against market abuse into their trading activities to achieve compliance efficiently and cost-effectively.

Commenting on the findings, Oliver Blower, CEO of VoxSmart, said: “For years, financial institutions have been reliant on multiple disparate vendor solutions to detect any potential cases of market abuse. The trouble is that This has not been effective and the risk of sensitive or misleading information being overlooked remains extremely high.”

“These days, surveillance is looked at on an individual conduct risk assessment basis – which means that very few areas of the business, if any, are out of bounds. Working towards a smarter way to monitor trade, markets, and comms data on one single platform so that there is more visibility into all activity cross-firm and cross-department, has to be the way forward.” Blower noted.