There’s no doubt that today's high speed capital markets and cross product, cross market trade volumes mean regulation struggles to keep up with changes in the market. MiFID II is an example of a financial regulatory directive that is seen by many as lacking real detail and remaining open to interpretation - and misinterpretation. In a panel discussion at the TABB Group Trading Surveillance event in London on last Wednesday evening, industry experts agreed that, in Europe at least, few financial services firms are afraid of regulators.
So as many new regulations remain wooly, ignored or have yet to be implemented - or in the case of ESMA (the European Securities and Markets Authority) the regulation is simply statements of clarification – the panel was asked how surveillance and risk is going to be managed moving forward? Questions were also raised about the regulatory burden in the future and whether those outside of the "Big Five" would be able to resource the demands for growing compliance departments. Will this lead to an uneven playing field?
According to TABB Group new compliance costs are indicated at between 512 and 732 million euro, with ongoing costs between 312 and 586 million euros. But while regulators are still determining what regulation will look like, the need for market surveillance is undiminished. Traders made about 13.3 billion euros ($18.2 billion) from market manipulation and insider dealing on EU equity markets in 2010, according to an EU commission study. With some arguing that firms can only do so much to survey markets themselves as trades cross multiple brokers and gateways, the panel discussed the need for fragmented market data to be brought together in a consolidated tape and surveillance performed at an aggregate market-wide level.
With respect to High Frequency Trading, there was discussion and agreement that pre-trade checks should be built in and regulators should be feared, as in some Asian markets where some market participants adopt a mindset that constantly asks "will I be allowed to trade today". That "Fear Factor" is key and there isn't fear of regulation yet in Europe.
The timeliness of market surveillance was discussed with the panel suggesting that transactions should be monitored retrospectively, but also in real-time as they happen. Clearly, there’s still a role for historic analysis of the market as some abuse takes place over an extended period of time and new abuse scenarios are discovered which can then be applied to historical data. It’s a little like having your DNA stored on file for a time in the future when forensic techniques improve. But there is also no doubt that the need for real-time surveillance to spot manipulation as it happens can be a significant factor for organisations looking to protect themselves and the market, which is one of the reasons it is mandated by Dodd-Frank and MiFID II.
Finally, the panel discussed how turbulent markets and highly publicised breaches of banking controls have demonstrated the importance of protecting market integrity. So while an increase in the complexity of market surveillance inevitably leads to an increase in cost, the panel felt that the punitive and reputational risks associated with surveillance failures justify the business case for improving compliance training, processes and technology. After all, just as you wouldn’t expect the police to prevent all crime by themselves, it’s clear that investment is needed in surveillance technology to give the regulators a helping hand.