Market Surveillance in Europe: Under Starter’s Orders Executive Summary The European regulators have reloaded the starting gun. The European Securities and Markets Authority (ESMA) “Guidelines on systems and controls in an automated trading environment for trading platforms, investment firms and competent authorities” will come into effect May 1, 2012 and will impact anyone who trades electronically. The shift from national to cross border regulation, post

Increased automation with today’s smarter algorithms obliterate the original remit for market surveillance as a look-back, check-and-balance on the market.  Incorporating elements of MAD and MiFID I as well as a precursor for MiFID II, the ESMA guidelines offer a clear illustration of future regulatory demands. 

As a result of existing regulation the growth of automation is already leading to unprecedented data demands.  Increased market fragmentation makes it seemingly impossible to spot market manipulation and abuse across the proliferation of European trading venues.  Financial services firms need to collate and analyse escalating data volumes from a myriad of legacy systems, at a time when investment in technology and back-office services has evaporated under budget constraints.  The need for investment firms to appear beyond reproach and invest critical resources to uphold firms’ integrity and avoid heavy fines, is making reputational risk the mantra of compliance officers and risk managers alike.  

Yet with regulatory obligation comes opportunity.  As the regulatory focus from Brussels shifts towards a greater pre-transactional assessment of risk, the wealth of valuable information and data generated in a centralised pooled resource is rewriting the rulebook for surveillance. 

Increased regulation may be the trigger but market surveillance for the 21st century is morphing into optimal operational control.  Those who ignore the signs may well be left on the starting line.

The TABB Group Vision Note Market Surveillance in Europe: Under Starters’ Orders looks at impact of further regulation on surveillance requirements in Europe, and the resulting challenges and opportunities that lie ahead for market participants.