SMARTS Group, a provider of market surveillance systems, has added a new alert to its SMARTS.broker product to help identify the manipulative trading practices of layering and spoofing.
Traders engaging in layering and spoofing send orders priced closely to the best bid or offer with no intention of executing to try and increase perceived liquidity in a stock.
SMARTS’ new layering alert identifies when a trader layers the order book – i.e. inputs multiple, similarly-priced orders – on one side of the market, starts executing on the other side of the market and then removes the layered orders from the exchange soon after. SMARTS says that in testing, the alert has consistently identified patterns that are synonymous with market abuse. The alert has been implemented for all of SMARTS’ existing broker clients at no extra cost.
According to Andreas Ruf, executive general manager, SMARTS broker compliance, the new layering alert follows increased attention on the manipulative practice by UK regulator the Financial Services Authority (FSA). In issue 33 of its Market Watch newsletter, the FSA highlighted layering as an area of concern, particularly from traders that use direct market access.
“Layering the order book is an issue that exchanges and regulators are focusing on and take very seriously,” said Ruf in a statement. “Broking firms need to be conscious of the implications of layering the order book on the integrity of the market and be diligent in their surveillance of this potentially harmful activity.”
New research from consultancy firm TABB Group estimates that spending on market surveillance in Europe post-MiFID will increase by a compound annual growth rate of 13% to €185 million in 2012 compared with 2009 levels.
Miranda Mizen, principal, TABB Group and author of ‘Post-MiFID Market Surveillance: New Obligations and Opportunities’, notes that given the increasing number of trading venues, “Changes in market surveillance needs more closely resemble a revolution rather than an evolution.”
The study also notes that brokers now use surveillance programmes to demonstrate sound risk management, execution integrity and legal conduct, while buy-side traders require a high standard of surveillance to give them comfort about the risk profile of their counterparties.
“As with trading infrastructures, surveillance systems and programmes need to be broken apart, then rebuilt,” added Mizen. “To join the dots in this new marketplace, you need a new pen. Changes in market structure have shifted the onus of surveillance, as individual markets may no longer have all the trading activity, brokers have clients across Europe and regulators have to learn to share.”