Keeping watch

Forthcoming new rules on market abuse are pushing investment firms to splash out on analytics and surveillance tools. Joe McGrath speaks to one of the FinTech companies hoping to benefit.

New start-ups in the trading space can easily be engulfed in the noise and excitement surrounding FinTech firms at present.

In the wake of the credit crisis, excitable journalists, techno geeks and traders looking for a competitive edge have been keen to trumpet dozens of companies as ‘the next best thing’. The result has been something of a dilution of the genuine talent that exists in the market. 

In the world of trading particularly, there has been an abundance of start-ups since 2008 as visionaries have sought to take advantage of a tougher regulatory regime which has forced banks to cut back in many of the areas in which they were most active.

For those entrepreneurs with experience of building a business, this has proven to be the ideal time to use their skills.

Among the current crop now seeing the reward for their hard work are Stefan Hendrickx and Kurt Vandebroek.

In 2010, Hendrickx founded Ancoa – a market surveillance and analytics business for both sell-side and buy-side firms.

At a time when global regulators were putting pressure on firms to becoming more financially resilient and have a better understanding of their activities, Hendrickx spotted an opportunity.

He was joined by Vandebroek in 2014. Vandebroek is also a serial entrepreneur best known for co-founding Trax, a cash management tech business that he sold to Sungard Data Systems in October 2006.

In June, Ancoa announced it had secured its latest client in wealth manager and prime broker Linear Investments.

Ancoa did not disclose the value of the contract, but said the group would be using its market surveillance and analytics services to meet its regulatory requirements across 27 markets.

Big opportunity

The news underscores the opportunity that exists for FinTech market surveillance and analytics businesses ahead of changes to European laws on market abuse which are scheduled to come into play in July 2016.

Under the changes, the existing four European directives on market abuse will be replaced with a new overarching set of rules which include a pan-European criminal regime for serious instances and legislative measures affecting a wider range of markets and issuers.

For the first time the manipulation of commodities markets, HFT and benchmark manipulation will fall within the remit of the new rules.

The service that Ancoa is providing Linear has been customised to go beyond the FinTech company’s standard regulatory alert service. 

The additions include custom data integration with Linear’s Order Management System and some bespoke alerts which red-flag areas that need further attention for potential market abuse.

Kurt Vandebroek, chief executive officer of Ancoa, said: “We are confident that our contextual approach will give Linear Investments’ compliance team… the necessary surveillance tools to detect and deal with market abuse, and help them fulfil their regulatory obligations as well as operational oversight requirements with confidence.”

Big targets

Vandebroek has been tasked with growing the business’s profile and client base. 

He explains: “As a software vendor, we make applications that are inline with the regulations and we can spot the different scenarios that the regulators sets as being manipulative.

“It is not an outsourced surveillance system that we provide, it is a surveillance platform that can be used by the client.”

Vandebroek says while clients each retain their own regulatory obligations, the service offered by Ancoa offers a series of red-flags which can alert them to behaviour which may require further attention.

Vandebroek explains: “Everybody has to make their own interpretation.  They usually revert to a consultant to define what regulations mean for their business. In the fixed income space, we have seen that.”

Vandebroek said that regulators are now starting to look more closely at fixed income, foreign exchange and energy markets which presents an opportunity for his business.  He said many of the current inbound client requests have been around the FICC space.

Big obligations

The Financial Conduct Authority has recommended that firms take a ‘three lines of defence’ approach to manage regulatory, reputational and operational risks.  For investment firms engaged in capital markets activity this means bringing together functions which traditionally operated in a siloed manner.

Ancoa is selling itself as a service provider which can build bridges between systems across trading, compliance and operations functions.

When asked about how you measure the value of the service that companies like Ancoa provide, he admits that it can be difficult to quantify in a traditional return-on-investment method.

He says: “How do you define it?  What are the potential fines if you don’t comply.  It is very hard to say what the savings are. [Companies] have to invest in compliance. It is their responsibility to do so.

“I see there is a very strong demand in the market and plenty of opportunity for surveillance and analytics players in the coming three to four years.”

Of course, the true value of such systems will only truly be tested when regulators publish details of those companies which have fallen foul of their rules.