Surveillance is only as good as the data that fuels it

Anthony Belcher, head of EMEA, ICE Fixed Income & Data Services, argues that passing the test on market abuse regulatory obligations will increasingly mean being ‘data fit’.

When market volatility spiked dramatically as the COVID-19 pandemic rippled through markets in March and April last year, two big things happened.

First, the amount of message traffic from global exchanges exploded to levels not seen by even the most seasoned trading professionals. Through the ICE Consolidated Feed we tracked a doubling in peak daily message traffic to 276 million, compared with the daily peak in 2019. The main difference from the 2008 financial crisis was the suddenness of the surge. On March 9 2020, Brent crude plummeted 30% as Saudi Arabia announced shock production cuts and the S&P Index fell by 7.6%, triggering circuit breakers.

Second, concerns over the potential for market abuse intensified. A survey from Duff & Phelps found that 32% of industry professionals thought market abuse risk had increased significantly during the pandemic, according to a report in City A.M., a London-based daily financial publication.

Market regulators were quick to issue fresh warnings about the need for participants to tighten up market surveillance, concerned that the shift to working remotely meant keeping tabs on trading activity would be more challenging. The UK’s Financial Conduct Authority issued guidance last May, reminding market participants of their obligations under the European Union’s Market Abuse Regulation (MAR) enacted in 2016.

Now, a year on from those tumultuous weeks, the verdict is in on how the MAR performed in the three years since enactment. A report issued by the European Securities and Markets Authority (ESMA) gave it a clean bill of health, declaring it “fit for purpose”.

That’s good news. But given the wild ride that markets went through last year, it’s worth asking, now that the dust has settled, are your surveillance tools also fit for purpose?

Surveillance systems are ultimately only as good as the data being fed into them. That’s because the market turmoil exposed weaknesses and gaps that caught some market participants unprepared. Was there the data at the right time, in the right format – and crucially, of the level of granularity required – to help ensure participants could fully meet MAR regulatory obligations?

If firms are running surveillance software and there are gaps in the tick data being used – thanks to dropping packets, for instance – then true depth of book isn’t being reflected and users can’t match what’s presented for surveillance purposes with what actually happened. The implications for being able to detect or reveal instances of spoofing, or layering – two practices in regulators line of sight– are obvious.

Meeting surveillance obligations is also about avoiding breaching threshold limits. Given this, being able to capture data every millisecond or less is essential during huge spikes, in order to stay on top of what’s happening.

Capacity is also an issue. Being able to withstand the kind of large message volume levels seen during the pandemic and storing the data are key elements of building the resilience market participants need. Moreover, standards will likely rise around the need for data that is properly normalised and stored in the cloud so it can be easily accessed and re-used.

There is no substitute for having access to a consistent supply of high-quality tick data, accurately time-stamped at the time of trade, in an easy-to-consume format. Broad coverage of exchange and OTC markets is also required, allowing monitoring of trading activity across multiple venues and asset classes.

ICE DataVault’s cloud-based store of exchange traded and OTC tick-level data across FX, equities, fixed income and commodities, shows how technology can evolve to offer a rich and deep set of historical data to help market participants and software vendors with their surveillance needs. It helps produce a consistent, unified view of market activity in a language that’s easy to understand and act on. Participants can access the data direct from the cloud, meaning that they don’t have to store the data themselves. The tick data can be easily plugged into surveillance systems and models so firms can comply with regulations.

Being able to rely on these capabilities is at the heart of any effective surveillance system, particularly at a time of heightened regulatory scrutiny. Given what we saw during the pandemic, regulations may well evolve from requiring surveillance to be conducted on a T+1 basis to more real-time. Firms will have to be able to identify new threats and upgrade their systems accordingly.

We already see surveillance system technology evolving, with some firms using automated monitoring of signals and alerts, as well as AI and machine learning to analyse them. Market surveillance vendors rely on level 2 market data from ICE DataVault to feed their surveillance programmes. A key differentiator here is that the data, taken from multiple sources and in multiple formats, is normalised by ICE to allow AI and machine learning to extract more intelligent insights.

While markets have calmed since last year, the lessons are clear. It’s not just about building the right capability to deal with the next market shock. Market participants must ensure their entire market surveillance capability is fit for purpose in a new world where success will increasingly be defined by being “data fit”.