By Oliver Blower, CEO of VoxSmart
Last month, the Financial Industry Regulatory Authority (Finra) fined BofA Securities $24 million (£19m) for more than 700 – yes 700 - instances of spoofing through two former traders, over a period of eight years.
Spoofing is where traders place market orders, before cancelling them prior to the order being fulfilled, with the intention of producing the appearance of market activity to deceive other market participants and turn a quick buck.
Interestingly in this case, Finra pointed to deficiencies in the supervisory systems that BofA Securities had internally to monitor for this kind of behaviour on its trading desks. While their systems were set up to detect algorithmic spoofing, there was nothing to flag manually engineered spoofing, done by a human trader. In this situation, the spoofing was done through the interactions of a junior trader and their boss, though how these interactions took place has not been disclosed. We can make a fairly decent assumption that at one point during those 700+ spoofed trades, there was some kind of digital record of their illicit intentions.
There are two sides to most spoofing stories, especially when it is spoofing via the collusion of several traders on a desk. There is the trade surveillance side – having the technology that proactively flags suspicious trading patterns to the compliance teams. But then there is the communication surveillance side, logging and flagging any suspicious communications on employee devices.
The fact is, since 2014, compliance technology for financial institutions has changed dramatically. Ten years ago, if we imagine a financial institution as a warrior, and the compliance technology as their armour, generally they were stepping onto the battlefield of financial markets in little more than a chainmail vest. These days, they have the option of full-scale armour and a helmet, akin to a 15th century knight.
Firms now have the capability, through modern technology solutions that reconstruct trades, to ensure that compliance teams are able to quickly, efficiently and accurately connect trade and communications data held within the business. This is vital in helping them to establish if suspicious activity, such as spoofing, is occurring. Sorting through huge buckets of trade and comms data is hard enough. When you consider the mammoth volume of trades that can be made by a desk in times of volatility, it is nigh-on impossible to do so manually, in constrained time periods. This is where automated solutions, which log, sort and present connected trade and communications information held within the business to the relevant internal teams, are so invaluable.
This is just one example of the developments that have been made over the last decade in communications and trade surveillance technology – and how it can be used proactively to help root out the bad actors, and ensure that financial institutions can never be accused of having deficiencies in their supervisory systems when it comes to detecting market abuse.
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