US and European brokers are expected to spend US$206 million in 2011 on new market surveillance programs, with spending expected to grow at a compound annual growth rate of 14% to US$268 million in 2013.
According to new analysis from research firm TABB Group, the costs are one result of the hundreds of laws yet to be written and rules to be implemented under the Dodd-Frank Act and MiFID II.
To comply with new regulations, spending on external solutions by sell-side firms is expected to grow from 28% in 2011 to 35% of total expenditure in 2013, as brokers leverage vendors' products to fit tight budgets and meet short timelines.
According to Miranda Mizen, principal and head of European research at TABB Group, who authored the report, ”Dynamic surveillance: Detection, prevention and deterrence', changes to market structure and new regulations mean conventional techniques need to be thrown out in favour of surveillance programs that match the markets' dynamism.
“It falls on the brokers as the primary intermediary between investors and exchanges to assist regulators in making sure that market surveillance catches up to the real-time dynamics of the market,” she says. “Recent market abuse scandals and the 6 May flash crash have revealed there is a yawning divide between the way markets operate and the way they are actually being surveilled.”
By focusing on three key components of market surveillance – detection, prevention and deterrence – Mizen explains that brokers can gain real-time and historical analysis and oversight to detect anomalies; controls and processes to prevent errant order flow from reaching the markets by applying broker-owned risk controls; and real-time monitoring, control and, acting as deterrents, heavy penalties.
She writes, “Brokers are now facing serious regulatory changes across the US and European markets, with Asia not far behind. This time it's a major overhaul and because surveillance is critical, it is in the spotlight.”