Your ultimate compliance companion

To ask questions of the front office, compliance officers need to back up their honed human intuition for wrongdoing with strong evidence from rich, whole-picture data. That’s where Nasdaq Buy-side Compliance comes in.

Nasdaq wanted to deepen its footprint in the surveillance space and rise to the top of the league table of those firms offering buy-side solutions. So it acquired Sybenetix, a buy-side behavioural analytics expert, in September 2017, and rolled out Nasdaq Buy-side Compliance. This product was recently awarded Most Disruptive Technology Solution in the 2018 HFM US Technology Awards, recognising its ability to leverage powerful behavioural analysis technology to cut down investigation times, reduce false positives, and efficiently identify potentially abusive behaviour. Specifically tailored for asset managers and hedge funds, it is being used in US and European markets, and soon to be implemented in Australia.

1Lod sat in on a conversation between Nasdaq global head of buy-side solutions Taras Chaban and head of buy-side product management Paul Young. Both are ex-fund managers, and both came over to Nasdaq with the Sybenetix acquisition last September.

We still work with people in compliance. You still need that human judgement.”

Taras Chaban: A compliance officer at a hedge fund recently said to me: “You make my job more interesting.” That’s the best praise we can get. Before they started using our buy-side surveillance solution, they had any number of legacy systems collating information from all different places, which the compliance officer had to sort through and allocate importance. A lot of this is still done manually, and these processes easily break down under pressure.

With our system, the compliance officer doesn’t need to do any of this. All the right information is in the right place, under a modern, rules-based system. We also have what we call a heat score, which gives priority and draws the attention of the compliance officer to particularly interesting data points. We can isolate these points and also indicate if they’re unusual in the context of the past behaviour of a trader or account. This also gives the firm something that they can show to regulators.

It’s not fully automated. We still work with people in compliance. You still need that human judgement. The system incorporates a video replay, so compliance can better understand the trade in question by watching the event as it unfolds in real time.

“It shows to regulators that the firm is taking these matters very seriously.”

Paul Young: That’s right. Nasdaq Buy-side Compliance drastically reduces compliance risk, but it brings more subtle, cultural benefits as well. It involves a shift of information and knowledge, so that compliance can now ask questions of the front office armed with powerful and unambiguous evidence. It creates a conversation of equals, which is really good for the internal dynamic of the firm.

It also gives the organization something concrete to show to investors. They have evidence of the steps they have taken to make shocks less likely, but also how they have fared since the solution was introduced. What was previously seen as a cost centre is now a powerful tool for sales.

Finally, it shows regulators that the firm is taking these matters very seriously and its reputation is better safeguarded.

Sell-side bore the brunt of the political pressure. But it’s the turn of the buy-side now.”

Taras Chaban: The sell-side developed and bought surveillance systems before the buy-side. They are more heavily regulated, and the heat was on them first. They bore the brunt of the political pressure. But it’s the turn of the buy-side now. The roll-out of the Senior Manager’s Regime, for example, encompasses every financial services firm in the UK, and then there is the impact of MiFID II, MAR, and other global regulatory mandates to be considered as well. They need to get their house in order.

“The buy-side requires safe and liquid markets as well, but they are risk takers.”

Paul Young: It does require a different conceptual approach when you’re building a solution for the buy-side as opposed to the sell-side. They are two different types of market participants. The sell-side is not risk-holding – they pass on the risk. They come in and out of the market and offset trades almost immediately. They deal in high volumes and need safe, fewer liquid markets.

The buy-side requires safe and liquid markets as well, but they are risk takers. They take a position and don’t necessarily hedge it and hold it for a period of time. They deal in lower volumes but across more markets.

So when you’re designing a system for the buy-side you need to focus upon the portfolio as a whole. You need the breadth of data covering a lot of extraneous detail and good information flows. You need to know, for example, whether a news release or earnings report was embargoed, and be aware of potential insider trading or front-running scenarios. If not, you risk paying substantial fines and penalties, and suffering irreversible damage to your firm’s reputation.

“We know everything about every individual, so compliance can concentrate on the most suspicious cases.”

Taras Chaban: Yes. If you’re a broker, you have only a partial view of events. If, for example, an asset manager sends an order for execution to a dealer, the dealer doesn’t know the full size of the order. When we deal with a buy-side firm, we get to see the whole picture for one organisation. We see all of their orders, all of their trades, all of their holdings, the fund inflows and outflows, and all their calendar items so we know who they meet and when. The data is much richer, and we can build fuller analysis. We know everything about every individual, so compliance can concentrate on the most suspicious cases. This really helps compliance.

One compliance officer said: “Nasdaq Buy-side Compliance is being used globally. This collaborative tool is setting a consistency of approach that’s enabling a new standard of workflow and reporting.”

But the system has to cope with more and richer data. This requires more complex models with more sophisticated analytics. There is increased coding and it poses a greater challenge.

“Broker dealers have a regulatory responsibility to watch accounts and report abnormal activity, but it’s challenging because they only see part of the picture.”

Paul Young: We also have to integrate our systems into the client back-end systems. We aim to make that as frictionless and seamless as possible.

One example of the difference between sell-side and buy-side systems is how much more difficult it is to spot front-running. Broker dealers have a regulatory responsibility to watch accounts and report abnormal activity, but it’s challenging because they only see part of the picture. We can do this for buy-side clients because we can see all the orders. From a regulatory perspective, there are different risks for different organisations.

 

 

 

 

 

 

John Baskott

Welcome to 1LoD's 2018 Annual Report and benchmark study, the largest and most comprehensive survey ever conducted on the front office control sector. This year's report takes insights from the results of our 86-part survey answered by 21 of the world’s largest financial institutions. We hope you enjoy reading the findings and thank you to everyone who contributed to making it a success. To find out more about upcoming events, training courses and other content from 1LoD visit www.1lod.com

John Baskott, co-founder, 1LoD

Researched and published by

1loD

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