The Evolution of Trade Surveillance in Financial Markets

In financial markets, trade surveillance is the process of monitoring trading activity for suspicious activity. It’s a crucial tool in protecting all market participants, but it can also complicate regulatory compliance. For this reason and more, financial institutions must understand the requirements of trade surveillance and enforcement trends to avoid potential violations.

Here’s everything you need to know about navigating trade surveillance.

Understanding ASIC Trade Surveillance

In trade surveillance, regulators, Market Participants (i.e. members of an exchange) and other licence holders monitor trade data including trading patterns to identify various types of market misconduct — for example, insider trading or market manipulation. The main goal is to uphold market integrity and protect participants, including investors and consumers. 

In Australia, the main authority responsible for oversight of markets and related trading activity is the Australian Securities and Investments Commission (ASIC). It uses a sophisticated trade surveillance system to automatically detect potential market misconduct and suspicious trading patterns. The system can also identify where participants may be getting inside information.

To do this, ASIC’s system analyses trading activity and other data from multiple sources, including its own databases, the Australian Securities Exchange (ASX), other securities exchanges and the Australian Taxation Office (ATO). ASIC searches through information such as:

• Order data.
• Origin of order data.
• Trade executions.tivi
• End-of-day summaries.
• Over-the-counter (OTC) market transactions and reference data.

As the ASIC surveillance teams and systems parse through the data, they look for patterns that could indicate suspicious trading activity. This may include predefined risk indicators or “red flags” including behaviours such as:

• Large order executions and/or deletions.
• High order-to-trade ratios.
• Stock pumps or dumps.
• Predatory high-frequency strategies.
• Layering and spoofing.
• Unusual quote/order price movements.

If ASIC suspects market misconduct, it will reach out to the market participant in the first instance to make enquiries into the behaviour. It also requires Market Participants to have appropriate surveillance arrangements of their own, which may lead to suspicious activity reports (SARs) — required to be submitted to ASIC by Market Participants under the Market Integrity Rules (MIRs ) — as a trigger to conduct further investigations or thematic reviews. It also monitors for overall compliance with its MIRs.

According to ASIC, this process of surveillance combined with SARs allows it to “identify harms more quickly and more accurately.” That aligns with the ASIC’s priorities for market intermediary supervision, seeking to establish fair and orderly markets, improve product design and distribution, ensure resilience and more.

What Financial Organisations Should Know About Trade Surveillance

As an Australian financial services licensee, your compliant conduct is crucial in protecting market integrity and the financial well-being of other stakeholders. Here’s what that means for you in the context of trade surveillance:

Your Responsibilities

You must ensure that every trading strategy or other activity aligns with the relevant general obligations under your licence, and that you understand and are complying with the relevant MIRs. If you execute trades on behalf of clients, you must be aware of the MIRs whether or not you are a Market Participant. These rules differ depending on the type of market, so it’s important to understand each regulatory requirement that applies to your firm. 

Depending on the nature, scale and complexity of your business, the types of monitoring and surveillance expected may include:

• Monitoring automated order processing limits and order rejections on a pre-trade basis.
• Monitoring for irregularities in employee trading.
• Clearly defining limitations on employee use and sharing of inside information.
• A real-time surveillance software that can alert for suspicious trading (for organisations executing trading volumes that are too large to monitor manually).
• Escalating suspicious activity internally and potentially making a SAR to ASIC.
• Submitting a reportable situation report to ASIC if the conduct involves a breach by your firm.

Get Trade Surveillance Support

Although integrating trade surveillance considerations into already intricate regulatory strategies can be difficult, it’s crucial for protecting your firm, your clients and the integrity of the wider financial market. Fortunately, compliance services and regulatory change tools can help.

At MIntegrity, we tailor our services depending on your needs.