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Where Are We Now? The Era of Trade Surveillance Automation

"For the first time compliance and surveillance people are demanding access to data instead of running away in fear from it."

The history of trade surveillance tools may not sound interesting, but Bill Nosal, head of strategic product management, SMARTS, NASDAQ OMX, begs to differ. At the Wall Street & Technology Analytics Edge event, Nosal wove a story of surveillance that demonstrated the leaps and bounds the industry has made in the last two years. The steep innovation curve surveillance is still climbing.

In the beginning…
The surveillance and compliance disciplines have come a long way from the early days of responding to market manipulation and insider trading alerts. The compliance person, once described to be a generalist responsible for understanding regulations and making sure the business wasn't getting into trouble, is now characterized by data mining and detective skills.

"I can remember as a compliance officer, one of my colleagues was running Excel sorts in tables every day. And they were doing sort after sort after sort," recalled Nosal. "They didn't even realize they could do not just primary sorts but secondary or tertiary sorts. Little things like that were consuming tons of hours and not taking advantage of technologies even available then."

The compliance officer of yesteryear was a responder. Vendors in the space competed on the number of alerts their software would generate, detecting behaviors like parking, ramping, insider trading, and generally fishy behavior. Early electronic communication tools detected bad words or rude sentiment, barely getting to the concept of collusion. Sadly, for the compliance persons, they could not go home until they had cleared each of the alerts.

After all, as Nosal put it, the only thing worse than not knowing you had a problem in the organization is having been alerted that there's a problem and doing nothing about it.

A metaphor for early trade surveillance
'This is what was really happening in the surveillance industry. Despite preventative measures and despite all the detection capability being produced, people were still going right around those barriers. They were getting things done in the fastest way.' -- Bill Nosal, head of strategic product management, SMARTS, NASDAQ OMX
"This is what was really happening in the surveillance industry. Despite preventative measures and despite all the detection capability being produced, people were still going right around those barriers. They were getting things done in the fastest way." -- Bill Nosal, head of strategic product management, SMARTS, NASDAQ OMX



The field became more exciting with the implementation of data analytics tools like market overlays -- overlaying trading activity with market movement. These enabled compliance to replay markets and see the order deck -- the bids and offers, and where traders stood in execution. It was the origin of the big-data movement in the compliance sector, but it was messy and the number of new alerts was overwhelming.

"Surveillance tools were supposed to document and detect certain behaviors from occurring, and yes, they are successful at identifying manipulation and insider trading, but often they lack the context of what that individual was doing," said Nosal. "To an effect, the same thing was happening on the electronic communications side… It got to the point where they were generating so many alerts that they had to sample e-mails and instant messages." The various defenses of the markets were falling short, and driving demand for new tools.
 
An era of automation
There are three important trends that have taken hold in the last two years that have revolutionized the role of trade surveillance and compliance:

1) A change of mindset of what a surveillance person is supposed to do: There has been a dramatic widening of what needs to be monitored. Although detecting behaviors like insider trading and market manipulation remain crucial, it became a small part of the role as the variety of asset classes to be covered and the number of automated mechanisms exploded. Regulatory initiatives have helped drive this change.

2) Electronic communications responsibilities have grown dramatically: "With the advent of social media channels, firms are trying to put in place procedures to either prevent employees from using different social media channels or to detect it," explained Nosal. "Employees will use these channels one way or another, so it going to become critical to monitor these different types of things."

3) Demand for data: "What really has changed and created this seismic shift in the last couple years is that for the first time compliance people and surveillance people are actually demanding access to data instead of running away in fear from it," he said. "And that right there is the beginning of where this trade compliance industry has come ahead."

What's next: managing the overload
The tools enabling compliance people to do their jobs are getting broader. They have also been getting a bit confusing. "During the last 2 years the industry saw rapid deployment of the number of key technology capabilities, one of the biggest being this notion of cross-market analysis, the ability to look at trading and securities traded on multiple exchanges and multiple geographies at the same time, and more importantly, the ability to look at related securities," he explained.

As a result, Nosal believes we're moving to an era of managing overload. The overwhelming volume of alerts has to be managed more efficiently. The new software will still perform the analytics, establish preventative controls, and enable these firms to leverage huge volumes of data to prevent malpractice and compliance events from occurring.

But more importantly, when you look at the ultimate intelligent trading compliance approach, it is going to be able monitor, store, and retrieve trade data, order data, and market data, as well as all relevant communications from all the disparate systems, both internally and externally, and then match these things appropriately. In this way you can start seeing a tremendous picture of where the customers ordered, where the firm traded, what communications were going on behind between the trader and that particular customer, who the customer knows, etc. Nosal says this discovery of networks, the capability to do that with different ways of looking at the data, without so much looking at the content of a particular communication, is the groundbreaking shift in surveillance technology.

To utilize this, the change the compliance role must evolve into is something more diverse and quantitative. Today firms are starting to hire compliance officers with no compliance experience, because what they are really looking for are data capabilities -- analytic and quantitative skills -- and looking anywhere they can get them. As technologies improve they enable the compliance surveillance people to become investigators, researchers, and discoverers.

The next big surveillance area primed for bleeding-edge breakthrough technology? Voice.

Becca Lipman is Senior Editor for Wall Street & Technology. She writes in-depth news articles with a focus on big data and compliance in the capital markets. She regularly meets with information technology leaders and innovators and writes about cloud computing, datacenters, ... View Full Bio

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Becca L
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Becca L,
User Rank: Author
6/30/2014 | 10:46:24 AM
Re: Compliance officer or Data Scientist?
That does make sense. And as long as they're logging it, that kind of data can be cycled back in to find the most effective routes of uncovering fraudulant behavior. Feeding the automated compliance machine!
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
6/30/2014 | 7:11:59 AM
Re: Compliance officer or Data Scientist?
Fair point. I would hope that most banks have automated logs that detail when a compliance officer looks into emails, or opens data somewhere in a bank. That is really the only way to monitor the compliance officers to make sure they aren't accessing data for reasons other than compliance.
Becca L
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Becca L,
User Rank: Author
6/29/2014 | 6:55:34 PM
Re: Compliance officer or Data Scientist?
With all that access to data, I wonder who is monitoring Compliance? That may seem silly, but insider risk is the biggest concern for these institutions, and who poses more risk than the people who can pull up and reqeust files with few questions asked?
IvySchmerken
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IvySchmerken,
User Rank: Author
6/29/2014 | 6:46:18 PM
Re: Compliance officer or Data Scientist?
Speaking of data, compliance officers have more data available to them than ever before. Not only can they request market data from exchanges, but they can screen emails, voice calls and videos. Some banks are also analyzing sensor data from the security cards that employees use to enter and exit doors in their firms.
IvySchmerken
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IvySchmerken,
User Rank: Author
6/29/2014 | 6:43:24 PM
Re: Compliance officer or Data Scientist?
Universities can train data scientists but compliance officers need to learn the securities industry and pass a number of exams. I think a career in compliance will most likely continue to post-graduate training. It does seem to be an in-demand career given the current wave of regulations.
Becca L
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Becca L,
User Rank: Author
6/29/2014 | 3:50:30 PM
Re: Compliance officer or Data Scientist?
Not only do they need to find patterns and use complex tools, they have to be able to see what additional data can improve their research - truly playing the role of detective! The industry is already seeing this happen. Nasdaq OMX reports an increase in one-off requests for market data from compliance teams, something they had never really seen even a year ago.
Becca L
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Becca L,
User Rank: Author
6/29/2014 | 3:45:06 PM
Re: Compliance officer or Data Scientist?
It is funny that universities are busy churning out the data scientists of tomorrow while financial service firms are pacing on the sidelines eagerly awaiting the right talent. In a years time, should they just be looking at their compliance teams instead?  It does seem compliance is the gateway job experience for the industry's most in-demand employee!
IvySchmerken
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IvySchmerken,
User Rank: Author
6/25/2014 | 11:24:11 AM
Re: Compliance officer or Data Scientist?
I agree. Compliance is becoming a more data-oriented, quantitative discipline. In the past, compliance officers had a legal background. Will the future compliance officer be a data scientist and a lawyer? I can see a new degree emerging that combines both disciplines. Or, is the job becoming so risk-metrics-based and reporting oriented, that legal expertise is going to be less necessary going foward?
 

 
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
6/25/2014 | 10:35:36 AM
Re: Compliance officer or Data Scientist?
The tools and analytical search capabilities will require experts with more of a data science background, as opposed to previous years where compliance experts were in demand. The amount of data, and the complexity/variety of data requires data experts who can use the newer analytical tools to find patterns and speed up compliance processes.
IvySchmerken
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IvySchmerken,
User Rank: Author
6/16/2014 | 9:43:50 AM
Compliance officer or Data Scientist?
The world of compliance is now flooded with data.The old way of screening for key words has not worked and compliance officers are being overwhelmed by the number of alerts they set.  Compliance officers are also going to need to analyze voice communications to check who the trader was speaking to at the time of trade. It all suggests that the skill set of the compliance officer is changing from being a lawyer to more of a  data scientist. It was interesting that Bill Nosal of Nasdaq OMX SMARTS said that financial firms are hiring people without a compliance background.
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