Wall Street & Technology is part of the Informa Tech Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.


05:15 PM
Larry Tabb
Larry Tabb
Connect Directly

Doing the Right Thing: A Regulatory Rant

Quattrone, Grasso, laddering, conflict-of-interest, front-running, late trading, hedge-fund investigations ... Will this ever end?

Quattrone, Grasso, laddering, conflict-of-interest, front-running, late trading, hedge-fund investigations ... Will this ever end?

While I have lived and worked my way through many a scandal - Milken in the '80s, the Treasury Bonds in the early '90s, OTC price fixing in the mid '90s, and the Internet hoopla and subsequent crash in the late '90s and '00s - I don't ever remember such a relentless barrage of problems, recriminations, criminal investigations and just plain bad press. It's enough to make you puke.

Whether it's because of the Internet crash, 9/11, ubiquitous e-mail use, lax oversight, the need for better fraud-detection or, more simply, greed and deceit, I don't know. But what I do know is that we had better clean up our act, or risk the regulators doing it for us, or worse, risk a loss of financial-markets confidence.

Enough lecturing! What can we do about it? We actually can do a lot.

While it starts at the corner office, we need to change the way we think and feel about regulation, compliance, and just plain doing the right thing. We need to seriously pay attention to not only making money, but how we make money.

We need to stop paying lip service to audit, compliance, and the regulators, and build ethics and compliance directly into our processes. This is beginning to occur as both brokerage firms and investment managers have taken some high-profile actions in regards to the recent late-trading scandals. However, a few key offerings and a few strong actions will not do it all.

Second, a more rigorous internal-audit process needs to be implemented throughout the industry, and we need to develop a sense of partnership between audit and operations. This is easier said than done.

Audit results unfortunately tend to be used more as a whip rather than a learning experience. This however, must change if you want behavior modification rather than sweeping the problems under the carpet.

Finally, as the old saying goes, "Trust everybody, but cut the cards." The compliance technologies that have been discussed over the past five years need to be implemented.

The first stage is to get the various communications mechanisms under control.

Before we even discuss what archival and surveillance, we need a method of linking communications channels back to the sender. Corporate e-mail and physical correspondence are not a challenge, however instant messaging, Web mail and voice are much more difficult as screen names and employee names may differ.

Once we know the sender, it is critical that all forms of communications: e-mail, IM, traditional mail, and even voice, are captured, archived, surveilled, indexed and accessible not only to regulators but to management. There are new document-storage capabilities that rely on traditional disk storage and provide more flexibility in reporting, surveillance and retrieval than the traditional optical platter.

Besides storing the data, we need to implement more comprehensive surveillance technologies. The traditional surveillance technologies have been keyword dependent and are easily manipulated. Keyword surveillance may be good for stopping sexual harassment, however stopping insider trading, high-pressure sales tactics, late trading, or any number of more conceptual regulatory issues is another matter.

Creating a formal process to manage communications is also important. No longer can we blame the problem on John or Mary in compliance. The industry must embrace workflow technologies that capture the communication, index it, surveil it, flag it, and retrieve it if necessary. Without stringent workflow technology, the surveillance, archival and retrieval processes will be dependent upon the weakest link.

We need to take these issues seriously. Not only are we paying a fortune to the regulators, but we are doing everyone in the industry a tremendous disservice. This will not be easy, but true leadership never is. If senior management respects profits above all else, then we will have an industry that demands profits above all else. Is that the industry that we want to work for? Is that the industry that we want to fight for? Is that the industry that we really want to call our own?

Larry Tabb is founder and CEO of Westborough, Mass.-based The Tabb Group, a financial-markets strategic-advisory firm.

[email protected]

Larry Tabb is the founder and CEO of TABB Group, the financial markets' research and strategic advisory firm focused exclusively on capital markets. Founded in 2003 and based on the interview-based research methodology of "first-person knowledge" he developed, TABB Group ... View Full Bio
More Commentary
A Wild Ride Comes to an End
Covering the financial services technology space for the past 15 years has been a thrilling ride with many ups as downs.
The End of an Era: Farewell to an Icon
After more than two decades of writing for Wall Street & Technology, I am leaving the media brand. It's time to reflect on our mutual history and the road ahead.
Beyond Bitcoin: Why Counterparty Has Won Support From Overstock's Chairman
The combined excitement over the currency and the Blockchain has kept the market capitalization above $4 billion for more than a year. This has attracted both imitators and innovators.
Asset Managers Set Sights on Defragmenting Back-Office Data
Defragmenting back-office data and technology will be a top focus for asset managers in 2015.
4 Mobile Security Predictions for 2015
As we look ahead, mobility is the perfect breeding ground for attacks in 2015.
Register for Wall Street & Technology Newsletters
Stressed Out by Compliance, Reputational Damage & Fines?
Stressed Out by Compliance, Reputational Damage & Fines?
Financial services executives are living in a "regulatory pressure cooker." Here's how executives are preparing for the new compliance requirements.