A common challenge firms face as part of their trade surveillance strategy is managing a high volume of false positives generated by their system. When incorrectly configured, these alerts can not only overwhelm compliance teams, but also increase the risk that truly manipulative behaviours go unnoticed.
Managing false positives effectively is therefore a crucial element to any trade surveillance system. eflow’s TZTS Trade Surveillance system is built with this in mind, ensuring that genuine threats can be identified quickly and efficiently, while avoiding staff wasting time and resources on irrelevant alerts.
What causes false positives in trade surveillance?
A false positive refers to an alert or flag generated by a monitoring system that inaccurately identifies potentially suspicious or non-compliant trading activity when, in reality, the trade was legitimate and followed the rules. This happens when the surveillance algorithm or criteria mistakenly interprets certain trading patterns as potentially problematic, even when there’s no actual misconduct.
When a system generates too many false alerts, it can result in inefficiencies as compliance teams have to review and investigate large volumes of alerts. This can drain the resources of teams, limit their effectiveness in identifying genuinely suspicious activity, and reduce trust in the validity of the system.
When these factors are combined, it can significantly increase the risk of firms failing to identify the telltale signs of market abuse. This can then lead to regulatory enforcement action, severe financial penalties, and reputational risk.
Reducing false positives through tailored trade surveillance
To manage the volume of false positives more effectively, firms need a trade surveillance system in place that is tailored to their specific trading activity. A one size fits all approach won’t work as each firm will be involved with different strategies, markets, instruments and client types, each of which come with their own unique criteria.
eflow’s TZTS Trade Surveillance system features conditional parameters as part of its core functionality, providing firms with the ability to set different conditions for alerts for various types of trading activity. The parameters can be set for factors like market volatility, liquidity, or client type. For example, this means it can distinguish between activity driven by natural market fluctuations and those which may be suspicious.
These parameters can also be tested in a dedicated sandbox environment where real or dummy trade data can be tested to assess whether alerts generated are accurate. This allows firms to fine-tune their parameter settings in a completely isolated system before they are migrated to their live platform, ensuring that alerts align with the specific criteria needed for detection.
Thanks to this level of customisation, TZTS increases the accuracy of alerts and significantly reduces the number of false positives reported. This enables firms to have more confidence that their compliance teams are focusing on genuine threats, while also working more efficiently.
Dealing with market volatility - a real world example
One key area where firms can benefit most from TZTS’s conditional parameters is in cases of market volatility. Market events, such as sharp drops in indexes, can trigger large volumes of false positives if a trade surveillance system doesn’t account for these conditions.
For example, in August 2024, Japan’s Nikkei 225 dropped 12% in a single day, representing its largest ever points fall over a 24 hour period. eflow’s TZTS system flagged this volatility, but offset the alert, recognising that this movement was a market driven event, rather than suspicious trading behaviour. Without incorporating this wider market context into its alert parameters, other trade surveillance systems might incorrectly flag such an event as requiring regulatory investigation, causing an influx of false positives into the system and overwhelming compliance teams.
In conclusion
Managing false positives effectively should be a top priority for firms looking to optimise their trade surveillance. Adopting a tool like eflow’s TZTS Trade Surveillance allows firms to test, refine and configure precise parameters that account for their specific trading activity and client types.
This not only improves accuracy, but minimises the ‘noise’ caused by false positives. This means that compliance teams are able to focus on genuine risks more efficiently and ensure that manipulative behaviours are identified faster.
To find out more about eflow’s conditional parameters and the TZTS system, request a consultation with one of our experts.
