Modern market surveillance: a protection against financial crime

Detecting complex trading patterns is crucial in identifying market manipulation and insider trading. This article explores modern market surveillance strategies and technologies to prevent financial crimes.

Marina Sundin

Product Marketing Manager Published 2024-09-10
A busy city street in Stockholm with modern buildings and a blurred person walking in the foreground.

Market surveillance is crucial to financial regulation, ensuring fair and orderly markets while preventing financial crime. In this context, regulatory frameworks such as the Market Abuse Regulation (MAR) and the Markets in Financial Instruments Directive (MiFID) are crucial because they provide the framework and guidelines that ensure integrity, transparency, and fairness in financial markets. 

As financial markets evolve with algorithmic trading, high-frequency trading, and increasing globalisation, detecting and analysing complex trading patterns have become more challenging. 

These patterns can indicate market manipulation, insider trading, or other forms of financial crime. Anti-financial crime efforts should focus on identifying and understanding complex trading patterns and their potential links to criminal activity. 

In this article, we’ll explore key strategies and technologies in modern market surveillance to detect and prevent financial crimes. We’ll examine the role of advanced analytics and trading data analysis in identifying suspicious activities. 

What are complex trading patterns? 

Complex trading patterns often involve advanced strategies that can be difficult to detect. These practices are designed to create an artificial market environment, deceive other market participants, and profit from these manipulations. Such patterns include: 

  • Layering or spoofing: Traders place multiple or large orders, often away from the touch on one side of the order book, to execute a trade on the other. Then, they remove the orders without the intention to be executed, thus manipulating the market price. 
  • Wash trading: A trader simultaneously buys and sells the same financial instrument to create confusing market activity, giving the illusion of increased volume and demand, with no real change of the ownership taking place. 
  • Pump and dump: This involves taking a long position in a financial instrument, engaging in additional buying activity, and/or spreading false positive information about the financial instrument to boost its price and attract more buyers. Once the price is artificially inflated, the long position is sold off. 
  • Algorithmic manipulation: High-frequency trading algorithms can be designed to manipulate market conditions by exploiting milliseconds of market data to create advantages for specific traders, potentially leading to unfair market conditions. 

How to detect financial crime in market surveillance  

In the context of market surveillance, financial crime refers to the umbrella term of “market abuse”, which involves: 

  • Insider trading: The illegal practice of placing orders or trading on the stock exchange to one's advantage through having access to inside information. 
  • Market manipulation: Actions an individual or group takes to deliberately mislead or try to mislead the market's fair operation. This can also be done indirectly by spreading false or misleading information about a financial instrument's supply, demand, or price. 

To detect market abuse, you need to follow: 

  • Cross-market surveillance: Monitor orders and trades across different markets and asset classes to detect unusual patterns that may indicate coordinated manipulation. 
  • Behavioural analysis: Examine the trading behaviour of individuals and institutions over time to identify deviations that might indicate illegal activity. This can involve the study of communication records, trade history, and social networks. 

Challenges in the detection and protection of financial crime in market surveillance 

Despite advances in technology, several challenges remain in the detection and prevention of financial crime: 

  • Data overload: The vast amount of data generated by modern trading systems can overwhelm traditional surveillance systems, making it difficult to identify relevant signals among the noise. 
  • Evolving techniques: Criminals continuously develop new methods to avoid detection, requiring surveillance systems to be constantly updated and improved. 
  • Jurisdictional limitations: Financial markets are global, but regulatory frameworks are often national. This mismatch can make detecting and prosecuting crimes that span multiple jurisdictions difficult. 
  • Privacy concerns: Using AI and big data in surveillance raises privacy issues, as it involves analysing vast amounts of personal and sensitive data. 

Technological tools

Market surveillance requires advanced technological tools to effectively identify these complex patterns, including configurable alerts, advanced analytics for detecting complex trading patterns, and reporting capabilities. 

Trapets offers robust solutions that help you, with technology and human expertise, detect and analyse complex trading patterns effectively. We help ensure your market surveillance efforts are both comprehensive and compliant with regulatory standards, safeguarding your business against financial crime. 

Conclusion 

Market surveillance is an evolving field that requires constant adaptation to keep pace with modern trading and the evolution of financial crimes. By leveraging advanced technologies, you can enhance their ability to detect and prevent complex trading patterns and associated financial crimes. However, ongoing challenges such as data overload, evolving criminal techniques, and jurisdictional limitations require adaptation and international cooperation in the regulatory landscape. 

The future of market surveillance will likely see an increased reliance on technology, coupled with more robust collaboration between regulatory bodies, to ensure the integrity and fairness of global financial markets.