The Need for Multi-Market Surveillance
Market surveillance functions within regulators and some trading venues are required to monitor market activity and behaviour in order to protect and develop market quality by identifying market abuse and financial crime. In so doing, the market surveillance function in theory provides a level of investor protection and ensures that investors receive a fair price on any investment decisions, achieved through an objective price discovery process.
In this new decade, the key questions are:
1. Is price discovery still objective, given the very high proportion of algorithmic and automated trading and if it isn’t totally objective, what are the implications for investor protection and market surveillance?; and
2. Do existing market surveillance methodologies protect investors and root out market abuse in the context of modern market structures?
At Avenues, we believe that market structures have changed so significantly in the last couple of years, particularly in Europe and North America, to call into question how effective is surveillance of the markets as a whole. Now securities markets are highly fragmented and globally interconnected, with trading in the liquid securities being scattered across five, ten or more public and private trading venues (as well as multiple asset classes), with various categories of market, light, dark, OTC and hybrids. Individual market surveillance functions however can only see their own traffic (a subset of the overall market), and on certain case by case bases, can request data from other co-operating venues or jurisdictions, where they observe abnormal behaviour from their own data sets.
At Avenues we believe this traditional approach of each venue seeing only its own traffic does not fully benefit total market quality and investor protection. Different parties are responsible for different areas of market quality – with no-one seeing the total picture in real time or even near real time. In Europe, best execution enforcement is the role of the investment firm, while market surveillance is the responsibility of some venues, and risk management and market surveillance (using transaction report data) is the responsibility of regulators. If that is not sufficiently complicated and fragmented, in Europe in particular the regulatory standards that govern trading venues are not uniformly defined let alone the level of enforcement, creating an unlevel playing field between exchanges and MTFs on the one hand, and public and private marketplaces on the other. Collectively, these issues lay the gates open for market abuse activity to remain undetected. Even regulators do not have access to all data and furthermore they do not have the tools to optimise the chance of detecting market abuse. So there is no single set of eyes monitoring market activity and therefore no-one can confidently state that the markets are monitored and all abuse activity has been investigated.
How can we make such a statement? The answer is quite simple – one only needs to ask, what is the ratio of successfully convicted market abuse cases to trades?
The answer is no-one knows. This type of information is not in the public domain, but everyone knows it is infinitesimally small. While trade volumes in each of Europe, North America and Asia soar into their millions on a daily basis, the annual volume of successfully convicted market abuse cases remains below 5,000 globally (we estimate). It may be lower.
Does this mean that market abuse is not happening and all the regulations, systems, procedures and controls are operating effectively? It is tragic to think that the scale of global investment in surveillance infrastructure has such a low return. Yet sub-optimal investment decisions on best execution matters alone has such a high cost of leakage – in the UK alone, we estimated in 2008 that the cost of failure to implement best execution requirements accurately was between £400 and £600mn per annum, an outcome that is a direct result of some of the unplanned consequences of MiFID. What is the total opportunity cost of market abuse? – it must be enormous, especially when one considers that the first decade of the 21st century is the lost decade for pensions, at least in Europe.
If for one minute it is possible that there is market abuse and it is remaining undetected, the outcome from the current scenario is that every individual pension fund or investment is under-performing. Sadly, no individual service provider or investment firm is in a position to take a leadership position in the surveillance area, for fear of breaking the mould. Furthermore, those investment firms or venues that are driven by shareholder profits are neither willing nor required by regulators to invest further and improve the quality of surveillance, mainly because they cannot resolve the problem individually, due to the high level of fragmentation (in policy, responsibility, data and technology). Regulators also cannot afford to divert scarce taxpayer resources to such activities - especially following the recent crises - as their focus is on systemic risk management. Market abuse is not yet in the public eye. There has been no scandal – yet.
Market quality and investor protection are critical success factors of retaining and developing liquidity. Equally importantly, they are critical success factors in retaining the store of value in securities and the confidence in securities markets. If liquidity suffers, the share price or the earnings of the actual venue providing the market in turn suffers. If market abuse is proven to be rife, then economies will suffer. So how can markets improve the quality of market surveillance?
Avenues offers a fresh approach to this whole topic and have found a route through all the conflicting objectives to achieve solutions for the greater good at a lower cost. Our approach covers regulatory, business, strategic, operational and technical solutions. Avenues has the expertise and has designed a potentially leading solution using expertise of professionals involved in market surveillance over several years, and with access to technologies that run surveillance solutions in national security applications, processing astronomical volumes of disparate data with the view to protect our daily lives. Our collective skills and experience can offer the world and collective like minded groups the chance to use market surveillance as a real asset. We will explain more of our ideas on future blogs.
In this new decade, the key questions are:
1. Is price discovery still objective, given the very high proportion of algorithmic and automated trading and if it isn’t totally objective, what are the implications for investor protection and market surveillance?; and
2. Do existing market surveillance methodologies protect investors and root out market abuse in the context of modern market structures?
At Avenues, we believe that market structures have changed so significantly in the last couple of years, particularly in Europe and North America, to call into question how effective is surveillance of the markets as a whole. Now securities markets are highly fragmented and globally interconnected, with trading in the liquid securities being scattered across five, ten or more public and private trading venues (as well as multiple asset classes), with various categories of market, light, dark, OTC and hybrids. Individual market surveillance functions however can only see their own traffic (a subset of the overall market), and on certain case by case bases, can request data from other co-operating venues or jurisdictions, where they observe abnormal behaviour from their own data sets.
At Avenues we believe this traditional approach of each venue seeing only its own traffic does not fully benefit total market quality and investor protection. Different parties are responsible for different areas of market quality – with no-one seeing the total picture in real time or even near real time. In Europe, best execution enforcement is the role of the investment firm, while market surveillance is the responsibility of some venues, and risk management and market surveillance (using transaction report data) is the responsibility of regulators. If that is not sufficiently complicated and fragmented, in Europe in particular the regulatory standards that govern trading venues are not uniformly defined let alone the level of enforcement, creating an unlevel playing field between exchanges and MTFs on the one hand, and public and private marketplaces on the other. Collectively, these issues lay the gates open for market abuse activity to remain undetected. Even regulators do not have access to all data and furthermore they do not have the tools to optimise the chance of detecting market abuse. So there is no single set of eyes monitoring market activity and therefore no-one can confidently state that the markets are monitored and all abuse activity has been investigated.
How can we make such a statement? The answer is quite simple – one only needs to ask, what is the ratio of successfully convicted market abuse cases to trades?
The answer is no-one knows. This type of information is not in the public domain, but everyone knows it is infinitesimally small. While trade volumes in each of Europe, North America and Asia soar into their millions on a daily basis, the annual volume of successfully convicted market abuse cases remains below 5,000 globally (we estimate). It may be lower.
Does this mean that market abuse is not happening and all the regulations, systems, procedures and controls are operating effectively? It is tragic to think that the scale of global investment in surveillance infrastructure has such a low return. Yet sub-optimal investment decisions on best execution matters alone has such a high cost of leakage – in the UK alone, we estimated in 2008 that the cost of failure to implement best execution requirements accurately was between £400 and £600mn per annum, an outcome that is a direct result of some of the unplanned consequences of MiFID. What is the total opportunity cost of market abuse? – it must be enormous, especially when one considers that the first decade of the 21st century is the lost decade for pensions, at least in Europe.
If for one minute it is possible that there is market abuse and it is remaining undetected, the outcome from the current scenario is that every individual pension fund or investment is under-performing. Sadly, no individual service provider or investment firm is in a position to take a leadership position in the surveillance area, for fear of breaking the mould. Furthermore, those investment firms or venues that are driven by shareholder profits are neither willing nor required by regulators to invest further and improve the quality of surveillance, mainly because they cannot resolve the problem individually, due to the high level of fragmentation (in policy, responsibility, data and technology). Regulators also cannot afford to divert scarce taxpayer resources to such activities - especially following the recent crises - as their focus is on systemic risk management. Market abuse is not yet in the public eye. There has been no scandal – yet.
Market quality and investor protection are critical success factors of retaining and developing liquidity. Equally importantly, they are critical success factors in retaining the store of value in securities and the confidence in securities markets. If liquidity suffers, the share price or the earnings of the actual venue providing the market in turn suffers. If market abuse is proven to be rife, then economies will suffer. So how can markets improve the quality of market surveillance?
Avenues offers a fresh approach to this whole topic and have found a route through all the conflicting objectives to achieve solutions for the greater good at a lower cost. Our approach covers regulatory, business, strategic, operational and technical solutions. Avenues has the expertise and has designed a potentially leading solution using expertise of professionals involved in market surveillance over several years, and with access to technologies that run surveillance solutions in national security applications, processing astronomical volumes of disparate data with the view to protect our daily lives. Our collective skills and experience can offer the world and collective like minded groups the chance to use market surveillance as a real asset. We will explain more of our ideas on future blogs.
posted by Avenues Alliance at
14:16
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