Three Unvarnished Truths About Trade Surveillance

Compliance is viewed as the “trading cops” and most compliance officers are fine with that.

Let’s look at a group that many firms used to call an unnecessary cost center: Risk. Back in the day, risk groups were the “trading cops.” They were sort of this mysterious team who worked in a back-office tinkering with excel spreadsheets. No one was quite sure what they were doing except telling traders they were overextended and needed to cut back their positions. We’ve come a long way since then, with many traders realizing how proficient risk professionals are at pricing up deals and providing unbiased analytical advice.

Here’s an example: Recently we were talking with a risk manager and he asked, “Have you ever thought about how much milk price exposure Starbucks has?” Come to think of it, no. Most analysts covering Starbucks (SBUX) are focused on coffee prices, but when you think about it, that’s a lot of milk. This is where risk managers really hit the road for the organization. Without them, firms like Starbucks will end up having a junior procurement person managing a huge exposure, like milk.

Executives started realizing how good risk managers flush out seemingly un-noticed exposure.

So here is the thing. Surveillance offers a microscope on the line between your firm and the market as a whole. It’s the very moment a ball hits a bat; foot meets ball; or stick meets puck. If it’s a perception change you’re looking for, that’s a good place to start.

Surveillance is not that complicated. But it’s easy to screw up.

Here’s the thing about surveillance, it’s just not that complicated. Some vendors flog things like A.I. and machine learning and they all sound really neat. But, honestly, that is a really heavy lift for something that is not that complicated. It’s like bringing a B52 Bomber to a fistfight.

As simple as it is to detect a spoof or a wash trade or determine best execution, there have been enough vendor flameouts to prove it’s really easy to choke.

The first chokepoint is canning the problem into a black box. As we’ve just witnessed, market dynamics change overnight. The black box starts pouring out even more false-positive ghosts. It all comes down to whether your solution is flexing with market conditions.

The second chokepoint is flubbing the underlying data. When we think about this from a data science perspective, the seamless flow of reliable and clean exchange order and trade data is the crown jewel of surveillance. It is the one thing surveillance teams can not afford to screw up. Why? Because if all else goes to heck and back, you’d be surprised what smart teams can do with a good set of clean and reliable data.

Surveillance is not going anywhere.

You can call it a cost center. You can call them trading cops. But surveillance is not going anywhere. The primary reason? Debt covenants are now requiring firms to keep an active surveillance program. Legislation like MAR and sanctions are very persuasive, but if you want to see a firm move fast, just wait until the lenders start requiring it. If you are a trading firm and these covenants have not turned up yet, it’s only a matter of time.

As always, we are data nerds at heart. As we look forward if you need assistance with getting order or trade data, surveillance, data science challenges or even just a sounding board, we are always game.