Market abuse has long been a concern for both asset and wealth managers. Insider trading is the most prevalent type of non-compliant activity that they’re likely to come across in their work, but they also face risks including market manipulation, front-running and spoofing, among others.
Identifying and managing market abuse is a highly complex challenge for these types of firms due to the variety of asset types, diverse client portfolios, and numerous internal teams involved across trades. Building on this complexity, regulators have heightened their scrutiny, making compliance with frameworks such as MAR (Market Abuse Regulation) and MiFID II (Markets in Financial Instruments Directive) more demanding than ever before.
To navigate these challenges, many asset and wealth managers are increasingly turning to technology as a tool to enhance their regulatory oversight and control. In fact, recent eflow research reveals that 65% of firms in this sector have expressed “significant investment plans” in technology aimed at mitigating compliance challenges.
Understanding the complexity of market abuse risks for asset managers
Asset and wealth managers work with a wide range of asset types, each of which come with its own set of regulatory frameworks and risk profiles. Their clients vary from institutional investors to high-net-worth individuals, each with different objectives and reporting requirements. This means the potential for market abuse can arise from numerous angles, all of which need to be monitored.
This is in addition to the fact that regulatory expectations of financial firms have increased significantly. In recent years, authorities around the world have increased their scrutiny of operational practices, particularly in Europe with the enforcement of MAR and MiFID II. These regulations have expanded what constitutes market abuse and introduced more stringent compliance requirements, making it imperative for asset and wealth managers to adopt advanced technological solutions to avoid penalties.
How technology is streamlining asset managers’ trade surveillance
Automation of trade surveillance tasks
Traditionally, trade surveillance has involved manual, human led processes, where compliance teams have to filter through vast amounts of trading data and communications to identify any suspicious patterns. However, this can be a time consuming and resource intensive task, especially if the number of trades undertaken increases.
Many firms are now using technology, such as eflow’s TZTS Trade Surveillance solution, to manage these processes more efficiently. TZTS, for example, can process vast amounts of trading data, flag any irregularities in real time, reducing the likelihood of human error and enabling compliance teams to focus on high-importance issues. The system also uses automation and machine learning to enable faster, more accurate detection of suspicious behaviour.
Real-time data analysis
Data analytics tools play a crucial role in the detection of early signs of market abuse by analysing trading data in real-time. They can identify patterns which may signal potential misconduct, such as sudden spikes or drops in trading activity which could indicate insider trading or market manipulation.
For asset and wealth managers, identifying these patterns early provides their compliance teams with the data to investigate and act quickly before a minor issue escalates. TZTS uses integrated machine learning to learn from historic data and refine its algorithm to improve accuracy and reduce false positives.
Contextual insight
By pulling together multiple data sources, an overview of key contextual information can be created in one place, enhancing and easing the evaluation of potential market abuse. For example, when an alert is triggered, TZTS collates data from multiple sources, including trader details, counterparties, communications, market data, news events, global index movements, and portfolio information.
This holistic approach enables compliance managers to evaluate alerts with a full understanding of the factors surrounding the trade, providing deeper insight into potential risks without needing to manually gather and compare data from various sources. This integrated view makes it easier to identify patterns, improving the accuracy and speed of compliance efforts.
One source of truth
Asset and wealth management firms often involve multiple teams in the trading process, such as portfolio managers, compliance officers, legal departments, and operations staff, all of which interact at different stages. This complexity requires streamlined, coordinated surveillance workstreams to ensure that all activities are properly monitored and compliant with regulations.
TZTS’s integrated case management tool facilitates efficient communication within these teams by centralising information and enabling seamless collaboration. It also maintains a full audit trail of all activities, ensuring transparency and accountability across the firm while reducing the risk of errors or compliance breaches.
The increasing importance of eComms Surveillance
Communication between traders, brokers, portfolio managers, and other stakeholders are increasingly happening across multiple channels, including email, messaging apps, and more. These communications are key to detecting early signs of insider trading or market manipulation, and can play a vital role in analysing signs of market abuse when alerts are triggered.
Given regulators’ increasing focus on preventing market abuse, the surveillance of electronic communications (e-comms) has become an important element of a holistic trade surveillance strategy. In fact, having a robust e-comms surveillance system is no longer optional - it’s a necessity.
For asset managers, the key challenge lies in connecting the dots between e-comms data and actual trading activities. An isolated email might seem harmless, but when cross-referenced with trade execution data, it could reveal signs of insider trading or market manipulation. This is where integrated trade and communications surveillance systems come into play. eflow’s TZEC eComms Surveillance platform integrates with TZTS, combining the monitoring of trade data with real-time communication surveillance, offering a more comprehensive view of potential misconduct.
Conclusion: Technology is the key to navigating regulatory complexity
As regulatory scrutiny intensifies and market abuse risks become more sophisticated, technology is proving to be even more important for the asset and wealth management industry. By leveraging automation, data analytics, and integrated surveillance systems, firms can streamline their operations, reduce resource strain, and improve their ability to detect and prevent market abuse.
eflow’s surveillance technology solutions, TZTS and TZEC, provide asset and wealth managers with powerful tools to strengthen their regulatory controls. These solutions offer a more robust, efficient, and streamlined approach to monitoring compliance, enabling firms to stay ahead of evolving risks while meeting heightened regulatory demands with confidence.
Discover how it can benefit your firm by scheduling a free consultation with one of our experts.
