Market Surveillance Trends: Technology and European Regulation Take Center Stage

The market surveillance industry has been growing steadily. Regulators have been working to gain better control over the activities of trading firms, exchanges, and other platforms. There is a strong incentive for market participants to get their trading-related activities in order by using surveillance systems. As trading, especially rogue trading, becomes more sophisticated, Celent expects surveillance systems to keep up with the complexity and evolve their functionality accordingly.

In the report Market Surveillance Trends: Technology and European Regulation Take Center Stage, Celent looks at important developments and recent market trends. As a fast-growing segment of the capital markets, market surveillance technology has taken the lead in utilizing the latest improvements in machine learning, big data, and cloud capabilities. Due to the complex nature of the beast, firms are not hesitant in seeking collaboration, and we have seen a number of partnerships between vendors that are strong in their own segment but need to have a more holistic offering to meet client requirements.

Regulation has been an important driver. Due to regulatory requirements put in place by the Dodd-Frank Act in the US, and the upcoming implementation of the Market Abuse Regulation (MAR) in Europe, there is a growing need for trading firms and regulators to look at the behavior of traders. This requirement is now being extended to include computer developers involved in program or algorithmic trading functions. Analyzing intent is becoming important, and sophisticated technology is being utilized to capture that. This is related to understanding the total conduct risk for these individuals. Firms are increasing surveillance of their employees to ensure they can deal with situations in which rules might be bent or broken.

Various market participants highlighted the requirement for a cross-asset and cross-market approach during this research. Firms are taking a more comprehensive approach to trading, and market surveillance systems have to be able to reflect that. The interest in using surveillance for different and newer asset classes was also an important criterion for evaluating systems. Celent is seeing the use of surveillance technology move beyond some of the standard asset classes such as equity into fixed income, foreign exchange, and OTC derivatives.

“The sharp rise in market data volumes and growing regulatory requirements have been a spur for vendors and trading firms to use the tools provided by modern technology to undertake their surveillance requirements,” says Dr. Anshuman Jaswal, a senior analyst with Celent’s Securities & Investments practice and author of the report. “Flexibility is important in an uncertain market and regulatory environment, and firms are trying to become more proactive in their surveillance approach.”

This report begins with a look at the recent trends in the market surveillance space, followed by a section on the role of regulation, especially European regulation. It concludes with a discussion on some of the areas for future development for the leading vendors.