Shortlisting Trade Surveillance Solutions

[Pages:65]Shortlisting Trade Surveillance Solutions

Anna Griem

September 2018 This authorized reprint was prepared for NICE Actimize, but the analysis has not been changed, and the report was not sponsored by NICE Actimize. For more information on the report, please contact Opimas ( or info@).

SHORTLISTING SURVEILLANCE SOLUTIONS

TABLE OF CONTENTS

TABLE OF CONTENTS.............................................................................................................. 1 EXECUTIVE SUMMARY ........................................................................................................... 2 INTRODUCTION ........................................................................................................................ 4 CONSIDERATIONS FOR SUCCESSFUL SELECTIONS ...................................................... 7

BUY SIDE / SELL SIDE / MARKET OPERATOR SURVEILLANCE NEEDS................. 7 HOLISTIC SURVEILLANCE .................................................................................................. 8 ARTIFICIAL INTELLIGENCE ..............................................................................................10 ADDITIONAL BUSINESS INSIGHTS ................................................................................11 COMPARING SURVEILLANCE VENDORS ........................................................................12 COMPETITION AMONGST SURVEILLANCE SOLUTIONS........................................12 SOLUTION PROFILES .............................................................................................................18 ACA - DECRYPTEX..............................................................................................................18 AQUIS TECHNOLOGIES ? AQUIS MARKET SURVEILLANCE (AMS)......................20 B-NEXT ? CMC:ESUITE......................................................................................................22 BAY STREET TECH..............................................................................................................24 BEHAVOX..............................................................................................................................26 BLOOMBERG ? BTCA AND BVAULT.............................................................................28 EFLOW ? TZ MARKET ABUSE .........................................................................................31 FIS GLOBAL ? PROTEGENT MARKET ABUSE .............................................................33

GMEX TECHNOLOGIES ? FORUMDETECT .................................................................35 IRISIUM ..................................................................................................................................36 ITIVITI - ANALYST ...............................................................................................................38 KX SYSTEMS ? KX FOR SURVEILLANCE ......................................................................39 LIQUIDMETRIX ....................................................................................................................41 LSEG TECHNOLOGY ? MILLENNIUM SURVEILLANCE ............................................42 NASDAQ SMARTS SURVEILLANCE................................................................................44 NICE ACTIMIZE ? HOLISTIC SURVEILLANCE..............................................................45 ONEMARKETDATA ? ONETICK TRADE SURVEILLANCE ........................................47 RIMES TECHNOLOGIES ? REGFOCUS MARKET SURVEILLANCE AND MAR ....49 SCILA ? SCILA SURVEILLANCE........................................................................................51 SIA - SIA EAGLE SURVEILLANCE ....................................................................................52 SOFTWARE AG ? APAMA EAGLEEYE ...........................................................................53 THE TECHNANCIAL COMPANY - JANUS SUITE........................................................55 TRADINGHUB - MARKET ABUSE SURVEILLANCE TOOL (MAST) .........................57 TRAPETS ? INSTANTWATCH MARKET & OUTSOURCED TRADING SURVEILLANCE .................................................................................................................... 59 TRILLIUM SURVEYOR........................................................................................................61 LOOKING FORWARD ............................................................................................................63

Copyright ? 2018 Opimas LLC

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SHORTLISTING SURVEILLANCE SOLUTIONS

EXECUTIVE SUMMARY

Market abuse surveillance requirements vary significantly by type of market participant, applicable regulations, and the trading strategies employed. To assist with trade surveillance vendor selections, this report details the leading market surveillance providers ? as well as additional obligations they are capable of assisting with, including: e-communications monitoring, voice surveillance, trade reconstruction requirements, and best execution reporting. This report also highlights novel ways in which solutions are improving alerting methodologies, as well as providing additional business insights for the market participants they serve. Readers are encouraged to use this report in order to quickly create a shortlist of the vendors suited for further consideration.

Even with Nasdaq SMARTS and NICE Actimize together owning over half of the US$284mn spend on trade and order surveillance software, new entrants are aggressively vying for business. While the market will likely experience further consolidation in the next 1218 months, new solutions are pushing the quality of

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surveillance forward across the board. Established solutions have, in several cases, adopted innovative approaches that were first introduced by newcomers to better target alerts, understand trader behavior, surface business insights, meet broader regulatory obligations, and automate investigations.

Looking at the field of solutions addressing trade and order surveillance requirements, there are only a few that produce alerts across both trade and communications data, including NICE Actimize, Bloomberg, and Behavox, and to a more limited extent Software AG, Scila, b-next, Trapets, and Irisium. At this stage only NICE Actimize and Behavox produce alerts for voice communications alongside trade and ecommunications surveillance.

Because the expansion of recent regulations, including the Market Abuse Directive (MAD) and the Markets in Financial Instruments Directive (MiFID II), has increased the buy side's trade surveillance and reporting obligations, several vendors have specifically marketed

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themselves to asset managers and hedge funds. ACA Technology, RIMES Technologies, Behavox, NICE Actimize, TradingHub, and Sybenetix (purchased by Nasdaq SMARTS in the summer of 2017), have all made a concerted push to win buy side clients transitioning away from reliance on their brokers and manual processes for market abuse and insider trading surveillance.

A few young firms like Aquis Surveillance and Bay Street Tech have positioned themselves to support the surveillance needs of exchanges, a group currently served predominantly by Nasdaq SMARTS and Scila.

Other solutions have made inroads in specific geographies. b-next has been a leader in Germany for well over two decades. Neurensic (recently purchased by Trading Technologies), Trillium, and ACA Technology have thus far focused their attention primarily on the United States. In Asia, the Technancial Company provides competition to market leader Nasdaq SMARTS. Scandinavia is served by a host of local players, including Scila, Trapets, and Itiviti.

In addition to on-premise and hosted deployment options, a few vendors also offer surveillance BPO. Trapets, Aquis, and ACA Technology both offer to stand

Copyright ? 2018 Opimas LLC

as the first line of defense investigating alerts for market participants who are too small to hire a full-time compliance officer, or who need to augment their existing team. Across the entire trade and order surveillance solution landscape, variety rules. When selecting a solution to install, augment, or replace current surveillance approaches, firms will need to be sure that they appropriately shortlist the vendors best positioned to meet their needs. In this report, Opimas provides mapping tools and vendor profiles to help the reader quickly identify the solutions that most warrant further investigation.

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SHORTLISTING SURVEILLANCE SOLUTIONS

INTRODUCTION

Regulations designed to prevent market abuse have become more stringent around the world, demanding that capital markets participants proactively demonstrate efforts to monitor and prevent behavior putting the stability of the markets and investors at risk. The Market Abuse Directive (MAD), the Markets in Financial Instruments Directive (MiFID II), ESMA Guidelines, the Dodd Frank Act, the Hong Kong Securities and Futures Ordinance, and the Singapore Market Misconduct Regime, cumulatively also require more market participants than ever before to surveil for market abuse and insider trading, and appropriately report and handle an incident when it occurs. Of course, market participants themselves have a number of incentives to stamp out threatening trading conduct: steep regulatory fines, reputational damage, and avoiding losses, to name a few.

The ability to anticipate and respond to regulatory inquiries centered on market abuse is of paramount importance. While 2015 represented the high point in recent years ? with fines reaching almost US$9 billion market abuse fines have become more frequent and are

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hitting a broader swath of market participants. Many players have gotten away, for some time, with approaches to handling these requirements that rely on manual, siloed processes. This has quickly become insufficient.

Market abuse fines have become more frequent and are hitting a much broader group of market participants.

While visualization and a user-friendly case management system were selling points of surveillance solutions in the recent past, the focus for market participants is now firmly centered on reducing costs by better targeting alerts, broadening surveillance across siloed channels, and automating investigations. Opimas expects overall IT spending on surveillance to rise ? reaching US$1.4 billion by 2021. For an in-depth analysis of this increased spending, expected impact on headcount, and challenges associated with each stream of surveillance, please refer to Opimas' Fighting Market Abuse: AI, Behavioural, and Holistic Surveillance Approaches report.

This report examines vendors in the trade surveillance space. While most of the profiled vendors only provide

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trade and order monitoring, a handful also offer communications surveillance. In trade surveillance, the market share leaders, far and away, are Nasdaq SMARTS and NICE Actimize. However, solutions focused on very targeted alert creation, like TradingHub, are quickly winning clients.

FIGURE 1. IT SPENDING ON TRADE AND COMMUNICATIONS SURVEILLANCE IT AND HEADCOUNT 2017 - 2021

20,000

1.6

Headcount in Surveillance IT Spend (US$ B)

19,500 19,000 18,500 18,000 17,500 17,000

1.4

Total Headcount:

Sell Side, Buy Side1, .2

Exchanges,

Regulators

1.0

IT Spend (US$ B)

0.8

0.6

0.4

0.2

16,500

2017

2018

2019

2020

0.0 2021

Source: Opimas Analysis

Copyright ? 2018 Opimas LLC

Market abuse surveillance requirements vary significantly by type of market participant, applicable regulations, and the trading strategies employed. This report details the leading market surveillance providers ? as well as other obligations they are capable of complying with, including: e-communications monitoring, voice surveillance, MiFID II trade reconstruction requirements, and RTS 27 and 28 best execution reporting. This report also highlights innovative ways in which solutions are directing their alerting methodology, as well as additional business insights they are able to provide for their clients. For market participants searching for pointed assistance surveilling voice and/or e-communications, look for upcoming Opimas reports on voice and ecommunications surveillance in capital markets.

Only a handful of the profiled solutions provide true ecommunications and voice surveillance alongside market surveillance capabilities. NICE Actimize has led the charge as a provider for holistic surveillance, proving itself time and time again with its global client base. Some newcomers, like Behavox, are trying to take market share on this front ? but it is early days yet. Other players who have been on the market for some time are also offering communications aggregation and

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more limited monitoring in conjunction with their market surveillance capabilities, including Software AG, Bloomberg, Scila, b-next, Trapets, and Irisium. These

offerings are not yet comprehensively surveilling voice alongside e-communications, but are moving in that direction.

Copyright ? 2018 Opimas LLC

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SHORTLISTING SURVEILLANCE SOLUTIONS

CONSIDERATIONS FOR SUCCESSFUL SELECTIONS

To help market participants sort through the jumble of players active in capital markets trade surveillance, this report profiles the leading and emerging solutions designed to detect and prevent market abuse. Product demos and interviews with end-users have helped to validate functionalities and assessments of the vendors profiled. Before jumping to the vendor mapping and profiles, Opimas recommends market participants carefully consider the following:

? Does the solution serve my needs as a market maker, sell-side, or buy-side player?

? Which asset classes are covered? How are alerts constructed?

? What other needs do I have, that a solution may be able to meet? (e.g. trade reconstruction, ecommunications surveillance, voice surveillance, best execution)

? How flexible is the architecture in case future integrations are desired?

In the following pages, Opimas will briefly discuss some key considerations to bear in mind while embarking on a selection, including: varied surveillance approaches per type of market participant, the move towards holistic surveillance, the promise of artificial intelligence, and additional business insights surveillance might surface. The field of solutions is vast, but carefully recognizing requirements should help the reader to shortlist the vendors most suited for further attention.

BUY SIDE / SELL SIDE / MARKET OPERATOR SURVEILLANCE NEEDS

It must be underscored that it would be a mistake for a market operator, buy-side, or sell-side institution to use a solution designed for another type of market participant. Just as judging misconduct across asset classes with the same algorithm is ineffective, so is using the same approach for these distinct players.

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