The Challenge of Joined-up Trader Supervision

Read time:
5 minutes

Charles Gregory

Regulatory Agenda

Regulatory pressures have been increasing around the Supervision of capital markets trading activities in recent years, leading to a growing data and technology challenge.

Between 2020 and 2024, the U.S. Financial Industry Regulatory Authority (FINRA) issued over 2,650 Disciplinary Actions, of which more than 500 reference deficiencies in Supervision. This includes:

Cases where trade floor supervisors themselves were active in perpetrating misconduct, such as the spoofing cases involving NatWest Markets and Bank of America Securities.
Cases where firms have been fined for poor Supervision in and of itself, without there being an underlying offence identified, usually framed as having inadequate or incomplete Supervisory controls and procedures.
Cases where firms have been fined due to Supervisors simply not reviewing control outputs.

In addition to FINRA, other major regulatory bodies such as the Commodity Futures Trading Commission (CFTC) and the UK’s Financial Conduct Authority (FCA) apply significant pressure around trader supervision and have extensive rules to meet.

The 5 Key Things Firms Need To Do To Comply

Conduct a thorough risk assessment to identify the risks incurred in the course of business.
Put in place the right blend of preventative and detective controls to manage or mitigate those risks.
Provide supervisors with access to review those controls, usually through an appropriate application that displays all the controls together in a single task list.
Track supervisory review of controls, to ensure that quality review is taking place and that regulators and auditors can see clear evidence of the same.
Implement strong governance, especially over the data feeding into the supervisory controls to ensure quality issues are identified and managed.

The Major Challenges in Achieving Robust Trader Supervision

There is a set of recurring problems that trading firms encounter when it comes to implementing their supervisory programmes.

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Data

Data fragmentation, due to underlying controls being performed in many different systems, with data in various formats and locations, making it hard to pull together and connect by trader or desk for supervisory purposes.
The result is poor data quality in the supervision layer, which results in both false positives and false negatives, for example where a control is mapped to the wrong individual, or simply doesn't have the right information associated with it for review.

Technology selection

There is a lack of off-the-shelf vendor products suitable for Supervision, so most firms find themselves needing to build an application in-house.
The difficult choice of technical components and architectures, as well as getting the right support model in place, all have a major impact on achieving successful outcomes.
Additionally, the issue of whether the chosen architecture allows for easy on-going maintenance and effective cost management presents further challenges.

Value deterioration due to inflexibility

Many supervisory systems are in-house built solutions with a focus on the initial scope only and not on the flexibility for user-driven change. Instead, all ongoing change often requires code changes and IT releases, resulting in inability to adapt workflows, tasks and alert logic to changing business needs. Manual workarounds then emerge, further eroding the value delivered.

Inadequate Review Tools

Applications that provide supervisors with only a superficial view of the controls. Often supervisors are looking at dashboards with no drill-down capabilities and their review starts to feel like a tick-box exercise, rather than meaningful oversight.
In addition, regulators increasingly expect to see that supervisors have access to pattern analysis highlighting how particular individuals' behaviour is evolving across time or across multiple controls.

Lack of Oversight and Poor Governance.

Inability to provide statistical reports on supervisory activity within the application itself. As a result, there is often insufficient management oversight and no quantitative quality assessment.
In addition, data governance and permissioning is a major challenge, resulting in situations where inability to partition what users can see within the application impedes information from being shared with the supervisory application in the first place.

Outcomes

Data Intellect has worked successfully with multiple trading firms on the development of Supervisory and Surveillance applications. Our approach focuses on achieving 5 key benefits:

> Reduced infrastructure costs through more efficient handling of data and analytics workloads.
> Delivering sustainable value by having the flexibility to easily configure workflows, maintain organisational hierarchies, and adapt controls and analytics as needed to cater for the evolution of the business.
> Establishing a technical solution which is scalable to allow for large numbers of active users from across your global business.
> Swifter time to market of new Supervisory controls, with the ability to rapidly configure and sense-check new controls, so that the supervisory application does not create an impediment to business growth.
> A coherent Supervision and Surveillance ecosystem that supports efficiency and transparency across the various business functions.