Market surveillance as a global conversation: Striving for collective responsibility

This article was written by Mike Googe, Product Manager of BTCA and Christian Benson, Regulatory Affairs Specialist at Bloomberg

Key industry and regulatory players in South Africa gathered in Johannesburg in May this year to discuss the landscape for market surveillance and promote best practices. Following the disruption of the pandemic, recent technological advances, and renewed regulatory focus, this first-of-its-kind event hosted by Investec highlighted the strong momentum there is globally to bolster market surveillance standards and capability.

The event aimed to kick-start a conversation that will hopefully soon lead to a voluntary code of conduct in South Africa. Far from being a ‘burden’ it was unanimously agreed that effective market surveillance is an important tool in raising international investor confidence in the South African markets.

As Bloomberg experts we contributed to several panel discussions by sharing our global perspective on regulations and best practices in terms of market surveillance, and by providing insights on the potential of technological innovation. This piece outlines the main themes and challenges that lie ahead for improving market surveillance discussed at the event.

We either all win or we all lose

The common thread running throughout the two days was that everyone has a role to play. Across market participants, exchanges, regulators, industry bodies, and technology companies, there was strong agreement that there are no competitive disadvantages in having robust and effective surveillance. In other words, everyone stands to gain from orderly and well-functioning markets.

Insider trading and price manipulation emerged as key priorities, with findings from the Johannesburg Stock Exchange (JSE) showing that these two issues form the majority of cases. The rise in trading volumes, fragmentation, and trading sophistication present the same challenges in South Africa as they do globally. With technology having a key role to play in solving for these challenges, this will require new skills, talent and indeed mindsets to unlock the benefits offered by technological innovation.

Other themes from the conference include the volatile growth of crypto asset markets in recent years and the growing prominence of retail investors as a force to be reckoned with. The rise of working-from-home during and after the pandemic has also prompted a renewed focus on communication surveillance and the ways in which practices need to evolve to account for a different industry landscape.

The conference revealed that the main challenge with setting surveillance policy is finding the right thresholds to allow focus on the most important alerts and to minimize the generation of false positives. This will require investment in technology as well as human resources to ensure effective prioritization, investigation, and judgement.

The way forward

There is a wide-spread optimism as market surveillance is a global regulatory theme and South Africa is well placed to learn from the experience of other countries in implementing similar requirements and designing standards.

Technology can capture huge amounts of data including prices, market ticks, transaction data, communications, and corporate events. This can all then be incorporated into automated monitoring tests that are both comprehensive – covering a full range of potential manipulation scenarios – as well as flexible and sensitive – to be appropriate to changing order characteristics and market conditions.

The innovation around artificial intelligence (AI) and machine learning (ML) can provide a more dynamic system of surveillance that evolves with market conditions. Harnessing data is key to setting meaningful tolerance thresholds to trigger alerts and identify priority items to help participants manage the workflow.

For example, insider dealing monitoring typically takes the form of checking for excess returns over a range of time horizons. Is a return of more than five per cent one week after purchasing a particular security simply a good investment strategy or something more suspicious? Data-driven technology allows firms to expand this simple check of returns over time to include other elements such as comparison to the underlying index to further probe the context of this investment performance.

In the case of news and corporate events, firms will want to check whether there is a surge in certain news stories or an unexpected corporate announcement prior to a particular trade that generated excess profit.

Technology allows for a simplified and more systematic workflow to monitor  all communications that indicate inappropriate sharing of information and assess priority items. Case management, evidence storage, risk identification, trend alerts and the generation of key performance indicators in exception management can all be improved by harnessing technological sophistication. This allows firms to anticipate issues and improve their own policies and procedures accordingly.

However, there are  considerations beyond technology. Investment is needed to evolve the mindset of compliance officers so that they better understand the technology in play and are able to justify and explain their surveillance policies and outcomes. As the industry evolves it will be necessary to attract new and diverse talent into compliance roles from schools.

While there is still much to do, the conversation has now begun, and the emerging but strong sense of collective responsibility bodes well for the future.

With our established presence in the South African market as a technology partner to buy- and sell-side firms, participating in this event reinforced our commitment to bringing transparency, efficiency and fairness to markets.

Speaking about the contributions of Bloomberg’s experts at the conference, Happy Shihau, Head of ICIB Compliance of Investec, said: “Bloomberg brought an important element to the conference that allowed the stakeholders to get a global view of best practices and review their internal processes. In this way, Bloomberg played a key role in ensuring that the South African financial markets can attain the highest standards of protection against market abuse.’

Bloomberg provides holistic compliance and surveillance solutions across trading, communications, and reporting to help financial professionals manage their firm’s regulatory risks and business mandates efficiently and effectively across the entire trading life cycle. Used by thousands across every regulatory jurisdiction, Bloomberg’s offerings are built with trusted real-time trading and communications data and technology that can adapt to an ever-changing regulatory landscape so you can turn compliance into a business driver for your firm