Compliance

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Mark Whiteman
Mark Whiteman
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The Risks of Communication on Wall Street

Regulators are increasing surveillance of all forms of communications, including social media, instant messaging, and more. Is your firm ready to comply?

In response to a rise in systemic risk across the financial services industry, the Securities and Exchange Commission (SEC) and the Financial Conduct Authority (FCA) have revved up the monitoring of communication for all financial services firms. While many of the Dodd-Frank regulatory requirements surrounding voice recordings and communication reporting pertain to swaps trading, this issue should still remain top-of-mind for firms across the financial services industry. In fact, even the Chief Compliance Officer role is changing to meet the demands of these far-reaching regulations.

At the heart of the issue are two primary questions: What communications channels should Wall Street traders be using? And to what extent should these be monitored?

Contrary to years past where trade communication was done by phone, a number of electronic and social media platforms are now available at traders’ disposal for regular means of communication. The traditional method of phone calls is still perfectly relevant, despite the fact that IMs and emails have emerged in recent years as the go-to methods for quick and easy banter. Yet the issue is not what is easiest and most convenient for traders, rather what is putting them most at risk. And in the wake of new social media and messaging platforms such as Twitter and Instant Messenger used as everyday communication channels, the need for robust compliance technology is now more important than ever.

The primary concern that arises with the use of IMs, texting, and other forms of social media is the level of informality they engender. Firms have the ability to put various internal controls and practices in place that limit how and when employees are permitted to engage in such communication, but that may only address part of the issue. Employees may be able to find alternative ways of communicating, such as by emailing after normal work hours. By ensuring that all communication is sufficiently tracked and monitored, firms put themselves in the best possible position for a few reasons.

First, it is important to note that while mobile voice recording and communication reporting stipulations differ from one financial jurisdiction to another, regulators around the globe are taking action in their respective jurisdictions to ensure that voice and data capture solutions are implemented at all financial institutions.  In 2011, the Financial Services Authority (now the Financial Conduct Authority) removed the exemption on the recording of mobile phones from its Code of Business Sourcebook. Then in 2012, the Commodity Futures Trading Commission (CFTC) approved a rule requiring registered futures brokers to record telephone calls in the hopes of capturing any detrimental or illegal activity. Prior to the implementation of these regulations, trading, particularly for swaps, was conducted via phone, making it difficult to monitor.

This is certainly not an easy task. Many firms are reluctant to install any type of disruptive technology into their current infrastructures, and many solutions only address part of the need to record, monitor, and flag in real-time. However, data capture and voice recording solutions have not only proven to restore credibility to the industry, but are also valuable tools for repurposing trade data for strategic purposes. 

One debate that has been an area of focus for regulators is the use of trading keywords as filters. Very often traders and trading firms will employ various keywords when communicating. The justification is that keywords supposedly minimize the amount of risk involved in certain verbal or electronic communication exchanges. But given how well today’s compliance technology and data recording software can identify very specific words, this may raise even more red flags than a non-filtered exchange. Studies have shown that when certain unique words or phrases are isolated they are very often completely harmless. However, when grouped together in something like an email subject line such as “End of the World” it tends to be an issue that may be worth investigating. In the case of Enron’s insider trading scandal in 2001, that subject line led investigators to an email that contained the phrase, “How about some last minute banking.”

The risks underlying communications among Wall Street traders are quite persistent and unavoidable. These are issues that the industry has already begun to address and will continue to deal with in the coming months and years. Regulation is as widespread and strict across the financial services industry as it has ever been, and laws have already been implemented for recordings of swaps trades. It is now up to firms to make sure that they have all of their internal controls lined up when it comes to the monitoring of employee communication. The ball is in your court, Wall Street.

Mark began his career as a management trainee for a major UK retailer before moving to Dun & Bradstreet where he was very successful at both sales and sales management. After a successful move into the IT sector with P&I Data Services, Mark spent three years with Cable & ... View Full Bio
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Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
5/29/2014 | 1:44:59 PM
Staying ahead of the regulators
Financial firms need to be able to monitor and analyze all types of communication across communication channels, so compliance can pick up on signals that may indicate trading violations. It is not easily done, but this is what regulators expect -- compliance integration across ALL media (social, IM, email, voice).
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
5/29/2014 | 6:06:46 PM
Re: Staying ahead of the regulators
This feels like one of those (many) cases where financial services is a sort of test-dummy for regulation that I could see spreading to many other industries. With all of the focus now on privacy, especially after the NSA spying programs were revealed, I think this is an area where consumer advocates would push for regulation in many different industries. Financial services is just getting a taste of what others will likely have to deal with in the next few years.
IvySchmerken
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IvySchmerken,
User Rank: Author
5/29/2014 | 11:21:43 PM
Re: Staying ahead of the regulators
While financial firms are required to monitor all communications, and compliance can be costly, this sounds a bit like big data analytics. Once firms are monitoring their voice recordings for key words to prevent insider trading, they also could pick up insights into which products are generating alpha or some other valuable piece of information that could lead to a business opportunity.
Becca L
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Becca L,
User Rank: Author
5/30/2014 | 2:12:43 PM
Re: Staying ahead of the regulators
Ivy, exactly my thought! I hear a lot about this, using predictive analytics on communication to identify patterns/trends that might lead to not only non-compliance, but poor trading decisions. They can even detect tones, arguments, fatigue.
Becca L
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Becca L,
User Rank: Author
5/30/2014 | 2:17:27 PM
Re: Staying ahead of the regulators
Interesting theory, Jon, and it doesn't sound all that far-fetched. NSA can use the financial services as test dummies to see what levels of communication can be recorded and to what degree of success they have in detecting illicit behaviors. Transfering that knowledge to the public... powerful and interesting...
IvySchmerken
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IvySchmerken,
User Rank: Author
5/30/2014 | 8:10:13 PM
Predictive Analytics
Becca, I didn't think of the potential for voice analysis. You are hitting on something that didn't occur to me at all. If firms used software/predictive analytics to detect changes in tone, mood and fatigue, it could point to a trader on the verge of a bad decision or a risky move. Although this could be like going to a fortune teller.
Becca L
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Becca L,
User Rank: Author
5/31/2014 | 7:16:52 PM
Re: Predictive Analytics
Ivy, voice analytics is becoming a really interesting element in compliance!

I've written on it before here: http://www.wallstreetandtech.com/risk-management/learning-from-past-mistakes-with-predictive-analytics/d/d-id/1268593? and http://www.wallstreetandtech.com/compliance/heres-why-tracking-voice-patterns-can-improve-compliance/d/d-id/1268463?

"We've plotted the historical data against Enron, and you can see the emotional trending peak and troughs. When you look at certain events you can see the actual peaks are where these instances [of stress and fraud] are happening. It's fair to say it's another piece of evidence a corporation should look at in an evaluation." - Mark Whiteman co-founder of Citicom Solutions
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