Bloomberg Professional Services
The financial industry has seen a dramatic increase in the complexity and volume of transactions, driven by advancements in digital trading platforms, globalization, and high-frequency trading. This presents significant challenges for firms and regulators in monitoring market activities and ensuring compliance with regulations. While the speed and sophistication of trading grow, so does the risk of illicit activities such as market manipulation, insider trading, and other forms of financial misconduct. There is also an increasing impact of retail and passive trading and the need to consider social media as a key price influencer. To address these concerns, financial institutions are turning to advanced technology solutions, including artificial intelligence, big data analytics, and automation, to strengthen trade surveillance and compliance programs.
This conversation brings together Patricia Torres, Bloomberg’s Global Head of Sustainable Finance Solutions, Perry Goetz, Bloomberg’s Global Head of Compliance Product, and Mike Googe, Bloomberg’s Global Head of Post Trade TCA and Surveillance to discuss today’s complex financial landscape, and how evolving regulation is impacting compliance measures.
Patricia Torres: Perry, as financial transactions increase in volume and complexity, how could technology enhance the effectiveness of transaction monitoring and detecting offences such as market abuse?
Perry Goetz: As technology continues to evolve, utilizing new technologies such as AI would allow us to improve speed, quality and efficiency to combat market abuse. With continued improvements in the structuring of unstructured content through Natural Language Processing and machine Learning across written and verbal communications, institutions and supervisors can leverage more advanced technologies such as audio-to-text transcription and translation to improve the efficacy within their surveillance programs.
The goal of any surveillance or monitoring program is to identify suspicious behavior. Rapidly improving technologies help normalize and unify structured and unstructured content along with significant improvements from traditional Lexicon or rules-based policies will play a key role in improving the effectiveness of defecting market abuse offences.
PT: Mike, are there other ways technology can help optimize the compliance process in an increasingly complex market?
Mike Googe: This complexity comes at a time when there is increased regulation and enforcement. This sets up a ‘perfect storm’ that pressures firms to remain competitive but also meet their regulatory obligations.
Technology primarily has a role to play in increasing automation and efficiency. Using data modelling technology can relieve the manual burden of identifying issues by helping to provide guidelines on appropriate parameters.
Automation can simplify the first level of analysis and investigation, which have typically been the proviso of humans. It helps identify issues but also plays a part in creating better efficiency. For example, factoring in other related data sets to the identification algorithms allows for an automatic identification of cross-product manipulation or a concentration risk to allow the formation of potentially stronger cases for human review.
Technology can also help identify priorities. It allows for an increased adoption of multi-threshold approaches for the same set of conditions, generating automated priorities for people to focus on. It can also open the way to illuminating ‘near-miss’ scenarios in terms of quantity and frequency, which can inform on the adaptation to surveillance policies.
Efficiency instead helps enhance the process of investigating issues. Being able to easily reconstruct the situation around an alert by capturing market data, news, corporate action and research to nourish the investigation is critical. Using technology to pre-sift and sort for relevant elements is key within the context of digital record keeping and collaboration.
PT: Since the pandemic, there has been a shift to remote working, causing a blurring of lines where personal devices and messaging platforms are used for the communication and exchange of official and confidential information. Perry, to what extent has this caught regulatory attention?
PG: The pandemic significantly changed how and where communication takes place whether through email, collaboration tools such as Teams or via mobile messaging tools. While all these tools existed before the pandemic, the growth of collaboration and the use of mobile communication tools grew exponentially, leaving compliance departments struggling to keep up.
Even though many of us are back in the office for much of the work week, those same communication channels remain highly utilized and in some cases, continue to grow in use. Mobile messaging platforms will only continue to grow as they are becoming a key tool to conduct business in various parts of the world.
Regulated firms have been left to make significant decisions to either allow use or ban altogether at the risk of alienating customer bases whose preference is to deal directly over these channels. Many firms were not prepared for these events and regulators began taking action where firms were failing to keep records of their employees’ business-related communications taking place on these mobile messaging platforms.
In the US, the SEC & CFTC used enforcement to crack down on the failures of firms to maintain and preserve electronic communications, fining nearly 100 firms more than $3 billion dollars. Other regulatory agencies such as the FCA have targeted individuals directly for their use of off channel communications where confidential information was shared.
One key point is that while most of the strongly worded language focuses on record keeping, the known enforcement actions specifically in the US also highlight the difficulty in managing every aspect of their staff’s client communications.
PT: What are the key elements of a holistic and effective record-keeping and surveillance system?
MG: To achieve a true holistic approach there are several key elements. Data quality and governance is foundational. Normalization across the various disciplines is essential to ensure that the same real world entities are uniquely defined such as counterparties, traders etc. This unlocks the potential to start combining traditional structured and unstructured datasets.
In addition, there is a cultural change required by the user community to really unlock the benefits. Where traditionally the individual disciplines have evolved in silos, there is now more and more reaching over to nourish each other’s data sets. This implies that surveillance is still driven by the point of view of the initiating team. These teams then push their findings ‘up’ for correlation and analysis.
Holistic future users will need to sit above their traditional silos – in the realm of the current compliance analyst where the streams of investigation join together. This will allow them to take advantage of the insights gained by these united datasets.
PT: How would you say historical surveillance systems need to change to meet market needs?
PG: Today there are many challenges facing true “holistic” record keeping and surveillance. Much of this is driven by the fact that surveillance systems have historically been designed to focus on different data sets, i.e. trading or communications (Ecomms and/or Voice). As a result of the historical solutions, there is no unification of workflow or data. Everything from rules and alerting engines, case management, and most importantly data does not reside in a structure that can be utilized across different scenarios.
To begin developing a holistic offering, it all starts with the data harmonization so that it is available across all surveillance use cases. Today, developing holistic or integrated surveillance has left many firms to begin scrambling across new technologies while they continue to have a heavy investment in many manual processes. With continued advancements in new technologies that use AI, we will be able to help structure and standardize content, improve the efficacy of surveillance and automate reconstruction of events.