By Jonathan Dixon, Head of Surveillance at eflow Global
The threat of market abuse has arguably never been more evident. Geo-political volatility, the rapid acceleration of artificial intelligence, and the increasingly interconnected nature of the financial landscape have fundamentally transformed market dynamics, information
flow, and the nature of market abuse. This rapidly evolving context has forced financial institutions and regulators to act swiftly.
In the UK, the Financial Conduct Authority (FCA) has significantly ramped up its enforcement action. Not only is action being levied against the perpetrators of market abuse, but firms are also being fined for a lack of appropriate regulatory planning. In most cases, the regulator has cited inadequate systems, controls, and practices that fail to mitigate trading risks and protect the integrity of the markets.
As a result, firms have been caught off guard – not by failing to submit a Suspicious Transaction and Order Report (STOR) on time, but by lacking the comprehensive safeguards to ensure compliant trading activities across all operations. These fines have ranged from individual desks to firm-wide practices and clearly illustrate the FCA’s expectation for firms to be taking a proactive approach to regulatory risk.
So how can firms avoid this type of action? Fundamentally, it’s crucial that they have robust mechanisms in place to combat market abuse effectively. This isn’t just about meeting regulatory requirements; it’s about preserving the ability to do business. A failure in compliance can jeopardise a firm’s trading licences, as seen in cases where institutions are barred from trading on platforms like ICE until they implement adequate surveillance measures. The reality is that market abuse isn’t just a theoretical risk; it’s a practical challenge that requires active management of how data is consumed and trading decisions are made.
Ultimately, having clear policies and procedures in place, a thorough understanding of trading risks, and implementing effective monitoring systems are not just regulatory necessities – they are essential for the sustainability of any trading firm. As the saying goes, if you think compliance is expensive, wait until you try non-compliance. By investing in these areas, firms not only mitigate their risks but also protect their ability to operate in an increasingly stringent regulatory environment.
Understanding your business and your risk
The first step in combating market abuse is a comprehensive understanding of your business. At its core, this means conducting a thorough risk assessment to identify and evaluate the specific risks inherent in your trading activities. It’s essential to break this down into three critical aspects: what you trade, how you trade, and where you trade. By dissecting your operations in this way, you can pinpoint where vulnerabilities might lie – whether it’s in the nature of the instruments traded, the methods and strategies employed, or the markets in which you operate.
This isn’t merely an exercise in box-ticking; it’s about gaining a nuanced understanding of the risks associated with every facet of your trading activities. For example, high-frequency trading strategies might require different controls compared to those needed for more traditional, long-term investments. Similarly, trading in emerging markets might present distinct challenges compared to well-regulated markets. Understanding these variations allows firms to tailor their compliance frameworks accordingly, ensuring that the right controls are in place to mitigate identified risks effectively.
In essence, this foundational knowledge is not just about safeguarding against regulatory penalties; it’s about ensuring that your business can operate confidently and sustainably in a complex and evolving marketplace. By embedding risk awareness into your trading practices, you lay the groundwork for a robust defence against market abuse, setting the stage for more detailed controls and monitoring systems that can adapt to your firm’s specific needs.
Building policies and procedures
The next critical step in combating market abuse is the development of robust policies and procedures that specifically address the risks identified in your business operations. This goes beyond simply drafting desk procedures; it encompasses creating a comprehensive framework that guides every aspect of trading conduct and ensures that all staff are fully aware of their responsibilities.
Effective policies must be reinforced with ongoing training for traders and relevant personnel to communicate what constitutes prohibited activities, such as parking, where an asset is temporarily transferred to another entity to disguise risk, and pre-arranged trading, where trades are set up in advance to manipulate market appearance.
Training must also cover more well-known abusive practices like spoofing, layering, and insider dealing, ensuring that traders understand not just the actions that are forbidden, but also the implications of engaging in such behaviour. This knowledge must extend to everyone in the firm, including those handling phone communications, where seemingly casual conversations can tip into the territory of insider trading, such as when a well-intentioned family member attempts to act on non-public information.
However, awareness alone is not enough. Firms need to be able to demonstrate to the FCA that these policies are not only in place but are actively enforced and understood by all employees. Evidence of training, such as regular workshops and documented refreshers, plays a crucial role in proving that your firm takes its compliance responsibilities seriously. By embedding these standards into everyday practices, firms not only reduce the risk of market abuse but also foster a culture of integrity and vigilance that supports sustainable and compliant trading operations.
Leveraging technology to build a holistic regulatory picture
Once your policies, procedures, and training are firmly established, the next step in combating market abuse is integrating technology that aligns with your risk management framework. Digital tools can significantly enhance your surveillance capabilities through process automation, enhanced data management, and improved communication across the organisation. When integrated correctly, technology can have a transformational impact on your ability to mitigate risks more effectively.
For instance, traditional trade surveillance processes may alert you to suspicious activity, such as a trader purchasing stock just before a significant company announcement. However, the real value emerges when you can correlate these trade alerts with related communications data, such as emails, messages or chat logs. This integrated approach provides a more complete, contextualised picture of the potential insider trading or collusion and makes it possible to pinpoint not only the occurrence of market abuse but also how it originated and was influenced.
The ability to capture pre-trade communications – where non-compliant intentions are often first discussed – and link them with post-trade events creates an additional, proactive layer of defence. It moves firms beyond merely reacting to suspicious activity and towards anticipating and preventing it by identifying the common signs that preempt market abuse.
While no trade surveillance system can capture every instance of abuse, increasingly sophisticated technology greatly increases the chances of detecting and understanding complex abuse patterns. With regulators increasingly expecting firms to take a holistic and tech-led approach to compliance, digital surveillance tools are rapidly becoming an essential component of a firm’s regulatory strategy.
The bottom line
As regulatory demands evolve, one certainty remains: the bar will only rise. Regulators are unlikely to dial back their expectations; instead, they will seek to leverage advances in technology and data analytics to scrutinise trading activities more closely. Firms must demonstrate a proactive stance by adhering to minimum compliance standards and actively anticipating and managing their unique risks.
Ultimately, combatting market abuse is not a one-off task but a continuous process. As technology evolves, so too must your compliance strategies. The key is to move beyond a reactive stance to one that anticipates challenges and sets a high standard for industry best practices – because in today’s regulatory environment, standing still is not an option.
