Understanding the processes behind an effective eComms surveillance strategy

It goes without saying that regulatory compliance is of critical importance for businesses operating in financial markets. A firm’s failure to meet their regulatory obligations can have significant consequences for their business, including enforcement action, financial penalties and catastrophic reputational damage. 

A real-world example that highlights the importance of this issue is the case of The Trader Forge, which recently announced a temporary pause in all operations due to unforeseen compliance and regulatory issues. This unexpected suspension of their business affects all aspects of the organisation, leaving clients and stakeholders disappointed. And sometimes, these short-term challenges are just the tip of the iceberg. 

The Trader Forge's predicament illustrates the vast and intricate compliance landscape that financial institutions must navigate. Transaction Reporting, Trade Surveillance and Market Abuse, Best Execution and Transaction Cost Analysis, and eComms Surveillance are just some of the critical regulatory areas that require dedicated processes, systems, and technology. 

For some organisations, managing all these regulatory obligations can seem like an overwhelming task. Factors such as increasingly granular data requirements, jurisdictional nuances, and strict reporting timelines also add layers of complexity that must be carefully navigated.

The regulatory impact of off-channel communications

One area of increasingly stringent regulatory focus is eComms Surveillance. This process involves monitoring and analysing electronic communication channels to detect and prevent market abuse and other regulatory breaches. In recent years, it has become a key area of enforcement action for global regulators as they identify new ways of tackling the increasingly sophisticated challenge of market abuse. 

However, the effective surveillance of electronic communications is particularly difficult to achieve. It requires sophisticated tools capable of handling vast amounts of data, identifying suspicious patterns, and ensuring adherence to regulatory standards. Beyond this, firms are also faced with the challenge of linking unstructured communication data to structured trade data in order to generate a holistic view of trading risk. 

Without the use of advanced technology, maintaining compliance is a daunting task. However, by understanding the potential of these digital tools and implementing them effectively, financial institutions can implement efficient and robust processes that will keep them compliant.

What makes an effective eComms strategy?

An effective eComms Surveillance strategy is rooted in the ability to integrate and utilise data from various communication channels, alongside trade data, to create a fully contextualised surveillance strategy.

Historically, trade surveillance systems have only been able to offer a relatively one-dimensional view of market abuse based on alerts that are configured around specific parameters and tolerances. While these are useful in identifying potential instances of suspicious behaviour, the insights available to firms were relatively simplistic and exposed gaps in their surveillance capabilities. 

Thanks to technological innovation, advanced eComms tools that not only capture communication data but also correlate it with trade activities are now able to uncover more complex patterns of market abuse. Data can be ingested from multiple digital sources, such as email providers, Microsoft Teams, Slack, Bloomberg messaging, and Red Box call recording. By doing so, they can detect subtle signs of market manipulation that might otherwise go unnoticed. An integrated surveillance system can correlate communication patterns with trading behaviour, providing a richer, more contextual information set. This enhances a firm's ability to detect potential market abuses, particularly as manipulative tactics evolve.

Ultimately, the goal is not to just monitor communications but to establish a robust link between eComms data and trading activity. This will enable firms to not only detect suspicious behaviour, but also identify the communication trends that preempt it, allowing for a more proactive and holistic approach to preventing market abuse.  

Why firms need to get it right

An effective eComms surveillance framework is a vital enhancement to the clarity and depth of regulatory insights that firms can access. The £5.41 million fine imposed on Morgan Stanley & Co by Ofgem for failing to record and retain electronic communications highlights the growing impatience of Regulators in dealing with incomplete data that hinders market abuse investigations. 

Regulators increasingly rely on eComms data, and they now anticipate that firms will maintain rigorous oversight of messages being shared between traders, advisers and clients. As a result, pleading indifference is no longer a defence for firms; there is an expectation from Regulators that they will have taken proactive steps to adopt a holistic approach to surveillance that not only captures data from various digital communication sources but also seamlessly integrates it with trade activities. 

By prioritising a well-configured, integrated surveillance framework, firms can stay ahead of regulatory demands and protect against the financial and reputational risks associated with non-compliance.

The result is greater than the sum of its parts

Implementing an effective eComms surveillance strategy isn’t about the deployment of individual technologies; it is about crafting a cohesive system where each component contributes to a robust and comprehensive regulatory strategy. 

While advanced tools capable of capturing and analysing vast amounts of communication data are crucial, they are only effective when integrated within a broader surveillance framework. This integrated approach allows firms to link unstructured communication data with structured trade data, providing a holistic view of trading activities and potential risks. 

Each element—from the surveillance software to the data integration processes—plays a pivotal role in ensuring that the system functions seamlessly and comprehensively. The real strength lies in how these parts interact, creating a framework that amplifies the system's ability to detect market abuse and regulatory breaches. 

Firms that focus on building this interconnected ecosystem of surveillance tools are better positioned to meet current regulatory demands, futureproof their operations against evolving Regulator expectations, and safeguard their operations from the complexities of modern financial markets.