Keeping the Train on Track

It has been said that regulators are struggling to keep up with high frequency and algorithmic trading because they have outdated methodology and technology. This battle has been likened to trying to chase a Ferrari on a bicycle.

But what happens when the regulators are constantly changing the rules, and the Ferraris are turning in the wrong direction at high speed? I liken this to regulators trying to switch tracks while your HFT train is barrelling along at 100 mph. If you do not protect yourself from high speed changes, you might find yourself thrown off the tracks.

The ability to respond to both regulatory change and split-second market anomalies can make the difference between emerging from the global financial crisis as a leader or as the firm that has to manage the aftermath of a messy derailment.

Imminent, sweeping regulatory reforms are not the only issues that firms have to grapple with.  Market structure changes underway in both the USA and Europe, from exchange mergers to regulatory “fine tuning” such as market maker quoting rules, circuit breakers, and limit up/down rules are already completely changing the game - and the playing field - and firms have to adapt to them. Cross-asset, cross-border trading is proliferating and creating new opportunities for arbitrage trading strategies that can throw a cross-asset "splash crash" into the mix.

Or, as Tabb Group told Advanced Trading: "strategies that go beyond speed, and emphasize 'cross-asset, cross-regional multi-temporal, asymmetric versus symmetric trades, even enhanced front-to-back automation'" are on the way. This means that real-time visibility - for spotting trading abuses, market anomalies and operational errors - is necessary on a global, cross-asset, 24/7 basis to remain in regulatory compliance and mitigate reputational damage.

Also, when regulations change you need the flexibility to change your systems to match and manage them; flexibility is key. Financial firms are constantly on the move, changing trading strategies and products to stay competitive. New regulations can throw new strategies out of compliance - the tracks keep changing.

And what about looming regulations beyond today’s mandates?   The rush to real-time trade reporting of swaps, for example, is causing some consternation among market participants because it may impede trade flow, according to Operational Risk and Regulation.  Real-time reporting is intended to help in the fight to avoid market abuse and as an early warning system to detect systemic risk. But T0 may be overkill, especially if monitoring and surveillance tools are in place.

In the Risk article, Frederic Ponzo, managing partner at technology consultants GreySpark Partners, said: "The real benefit of real-time surveillance is with identification of fraudulent activities, market manipulation and errors."

And if you could put compliance in control by building surveillance detection and workflows on your own terms, so much the better. Because every firm is unique, brokers need to customize their case management systems for efficient incident investigations, rapidly and continuously, in addition to customizing real-time abuse detection and market monitoring scenarios.

By gaining visibility to potentially abusive and erroneous trading activities, with the flexibility to adapt to new trading patterns and regulations, firms can protect themselves and their clients from market risks and not run afoul of shifting market regulations.  They can quickly pinpoint threats and tailor responses without disruption, maintaining regulatory compliance now and into the future - effectively changing tracks at 100mph or more.

-Dan