Do you know what’s in your archives?
Find out before the regulators do
MAR has been in force in the EU now for 86 days and counting; MiFID II is not far behind. These directives
widen the scope for potential market abuse considerably, as well as the requirement to capture the data
that evidences it.
ESMA and the UK’s FCA have made it plain that every firm now needs an automated surveillance system
to achieve compliance.
We know that very few institutions have tackled MAR effectively yet. Some have adapted existing systems;
others are thinking about “automating”; the majority seem paralysed and are waiting for FCA guidance,
the first big fine, or a recommendation from their peers.
Just as disturbing is the very narrow focus solely on the capture and analysis of transaction data.
Our extensive analysis of all the enforcements relating to market manipulation/abuse in the US/EU since
2002 shows that virtually all the best evidence that has been used in court or by regulators in their
actions, has been derived from communications. This provides the trail, the context and the development
of the problem – the transaction is the smoking gun but by then the damage has already been done.
We also know that the regulators are not waiting – market abuse is being committed as we sleep, and
regulators are better placed to find it than ever before (think about their improving tech, whistleblowers,
investigative journalists and more STRs/STORs across more asset classes).
Defensive reporting will only be tolerated in the short term by the regulator and may also have repercussions
in the market if “suspicion” is unfounded; quality reporting, not quantity, will become the expectation.
The real evidence of market abuse is normally always in communications data. This data is already in
the firm’s possession, and in most cases is held in deep cold storage like a ticking time-bomb waiting
to go off.
The following extract is a classic case of “position parking”, where Trader A wanted Trader B to hold bonds
temporarily on his behalf to evade any charges to his trading profits and the resulting negative impact
on his year-end bonus; the compliance officer was satisfied with the transaction data and Trader A’s
bogus explanation for his motivation.
Behavox | 27/09/2016
Confidential and Proprietary
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Trader A chat to Trader B not reviewed by Compliance:
“i have 4 small bonds that i’m looking to turnover today for good ol’ month end/aging
purposes ... i like these bonds ... and would more than likely have a higher bid for these
later this wk when the calendar turns ...”
The transaction was done and Trader A sold the bonds to Trader B, avoiding $600,000 in inventory
charges. Trader A’s subsequent repurchase of the bonds, got flagged by Firm A as a possible “parking”
transaction. Firm A’s compliance officer interviewed Trader A who stated falsely that he had “been
hoping to get more individuals involved in the bonds” but subsequently decided to repurchase the
bonds because he was “confident that they could package some of them together and make them
attractive to investors”.
We have used more than 600 past cases like this to train our system to recognize true positives, eliminate
most false positives, and cancel out all that irrelevant noise. We then tailor these scenarios to the client’s
requirements, refining the system to take into account the risks each individual firm faces. These scenarios
are already operational and deployed, finding cases of market abuse in the real-time data of our clients
and PoC clients.
Below is a real example of unlawful disclosure of inside information (breach of Article 10, MAR), detected
by a Behavox scenario set to identify instances of a combination of key phrases, short chats, internal to
external communication, and communication at unusual hours, all of which combine to flag a true positive:
A: i have an -82 bid feb/march dated looks like a punchy number
B: who bidding?
A: ClientNameX pnc
A: very pnc
A: name cant get out
B: sure
B: anything
B: 8-12 cal {{feb}}
A: so please please keep to yourself ...... i still bid -20
Behavox identified this hotspot of risk in the chat, which was then escalated and ready for immediate
review by a compliance analyst just seconds after the chat took place.
Transaction data may be the smoking gun but it is prone to being manipulated and gamed by crafty
operators. Communications data, on the other hand, is black and white.
At Behavox we can help you identify developing risk before the trigger even gets pulled.
If you are interested in learning more or benchmarking your compliance with MAR, you can view our
library of risk scenarios by requesting a demo and initial meeting – email [email protected].
Behavox | 27/09/2016
Confidential and Proprietary
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