Analysis, Markets

Regulators clamp down on surge in trading venues

By Ellesheva Kissin
trading venues
Image via Getty

Trading venues used by banks have exploded in number, fuelled by the rise of electronic and algorithmic trading, raising concerns that banks are struggling to monitor their activity on these venues which now run into the thousands.

Technology has drastically increased the number of trading platforms, which are often subsets of traditional exchanges but require individual surveillance, explains Rob Mason, director of regulatory intelligence at Global Relay. This has left banks scrambling to monitor countless venues for potential market abuse.

As compliance teams face complicated “data challenges” and “enormous resource requirements”, experts say, scrutiny from regulators is growing. 

JPMorgan was penalised in March for shoddy trade surveillance by the Office of the Comptroller of the Currency and the Federal Reserve, which jointly found that the bank had failed to surveil billions of instances of trading activity on at least 30 global trading venues

The bank was conducting “unsafe and unsound” business, the two regulators warned, slapping it with a fine close to $350m.

Crypto’s role in trading venues 

Experts say the problem is being exacerbated by the fast-accelerating number of platforms on which banks trade. This dramatic increase in trading venues has spiked from traditional stock exchanges to include a myriad of new platforms, including those supporting volatile markets like cryptocurrencies. 

Major banks often disclose a number of the trading venues they use, with the disclaimer that the list is “non-exhaustive”: Société Générale operates on 232 venues across different asset classes; Bank of America on 216; JPMorgan on 116 and UBS on 213. Some venues appear to be listed multiple times in these documents, however. “But the real challenge is that beneath those platforms, there are multiple subsets of up to around 1500 different venues,” explains Mason.

Technology has brought controversial new venues like Robinhood, a commission-free trading platform that supports crypto, and a UK-government-proposed ‘intermittent trading’ venue, into the limelight. 

Matt Smith, CEO of surveillance tech firm SteelEye, says there has been a sharp growth in “new age platforms that didn’t exist 10 years ago”. 

“Technology and financial markets evolution mean that they’re pretty prevailing … you suddenly had all these crypto venues that the regulators don’t even really know how to regulate properly just yet.”

A hidden problem

While banks publicly list the main exchanges they use, these come with multiple platforms, each with its own so-called market identifier code for traders to use, which can send venue numbers into the thousands. 

Each one of these venues needs to be separately surveilled for market abuse. “The folks that I speak to are being consumed by this [problem],” says Mason.

“Traders tend to assume that because it’s [the same parent exchange], then all the downstream controls will be in place because obviously it’s a well-known exchange. But unless there’s vigilant governance … this is overlooked.” 

The need to monitor spiralling venue numbers has become more urgent in the wake of the JPMorgan fine. “Really [it’s] just this huge data challenge, because there are just so many of these venues…after this JPMorgan fine all the banks are going back and trying to perform a reconciliation,” says Mason. 

“[For] these big firms, geographically, it’s quite hard to keep tabs on all of those things unless you’ve got very strong governance processes embedded.” 

A report from risk intelligence firm 1LoD in March also flagged the issue: “The biggest challenge that we’ve had is the number of different, external trading platforms that people are utilising and the availability of data from them,” said one surveillance chief in the report.

Mason adds: “This has caused enormous resource requirements for banks to check that [proper governance is in place].”

Regulators are scrutinising trading venue data

The UK Financial Conduct Authority issued a market watch newsletter this month which highlighted surveillance issues related to “a wide range” of “complex” trading venue systems.

Research from EY’s Robert Mara, who leads the firm’s financial services risk technology team in the Americas, shows “heightened” expectations from the US Securities and Exchange Commission and the Financial Industry Regulatory Authority, with a “keen interest” in the venue management framework.

Firms are being challenged to create or update “fragmented or outdated” trading venue inventories, and to demonstrate that they are surveilling venue data effectively, Mara said.

It poses “significant reputational, operational and regulatory risks”, he added.

US regulators are “unforgiving” when banks fail to keep records and capture data on trading activity, says SteelEye’s Smith. The big issue here, he says, is whether banks are failing to capture trading data from these platforms.

On top of JPMorgan’s near-$350m fine, the bank must take corrective actions. These include seeking approval from the OCC and the Fed before onboarding new trading venues, and bringing in an independent third party to conduct a trade surveillance programme assessment. 

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