A helping hand in financial markets’ trade surveillance
Compliance is a top priority for financial markets’ participants, especially as market volatility persists and the number of alerts generated continues to rise.
This content was originally published by IBS Intelligence, July 2024 edition.
As a result of pressures from increased regulatory requirements and market volatility, compliance teams are seeing a notable rise in alerts and false positives while struggling to find talent with the right combination of skills. However, financial institutions have found a middle ground with artificial intelligence (AI), which can process high volumes of data streams efficiently, uncovering patterns, and predicting fraud or other forms of market manipulation in a fraction of the time otherwise taken. How does this work in practice?
Understanding trade surveillance with AI
Trade surveillance models play a crucial role in safeguarding the stability and integrity of financial markets, and are constantly evolving. These models are crucial to analyzing trading transactions and market data to identify potential violations of surveillance regulations. However, this process can be extremely complex, which is where AI algorithms can lend a helping hand. Detection agents – the algorithms at the heart of trade surveillance – analyze trader activity by computing specific metrics related to abusive patterns; compliance officers then set thresholds against these metrics, and when exceeded, alerts are generated.
This partnership with AI enables compliance teams to tackle increasing alert volumes and regulatory requirements against the backdrop of a tightening talent market. Regulatory bodies worldwide are continually enhancing and expanding their oversight. Recent surveys note difficulty finding skilled staff and implementing effective software solutions. Compliance officers face the challenge of keeping up with the growing number of alerts while navigating evolving regulatory terrain, all with fewer staff.
What does AI bring to the table?
Adopting AI in trade surveillance can help firms and regulators to align on constantly evolving rules as AI enables more thorough and efficient monitoring of market activities. Regulators recognize the potential of AI to enhance surveillance capabilities, with some even advocating for its integration in compliance processes. However, it’s important to note that this endorsement comes with the expectation that AI systems are transparent, explainable, and subject to rigorous oversight.
The scalability and low latency capabilities of AI-driven trade surveillance technology are pivotal in supporting large organizations grappling with increasing trade volumes. Scalability ensures that surveillance systems can handle growing amounts of data and transactions without compromising efficiency. Low latency ensures that alerts are generated and analyzed in real time, enabling timely responses to potential violations. For example, through real-time analysis of alerts, compliance teams can avoid the traditional ‘bulk’ analysis method, which sees teams analyzing sets of alerts at a time. This causes delays, greater chances of inaccuracies, and requires huge amounts of manpower.
Moreover, integrating AI into trade surveillance technology goes beyond mere automation. It empowers compliance teams with advanced analytics and pattern recognition, enabling them to classify alerts effectively and quickly, and identify subtle and complex market abuse tactics that may elude traditional surveillance methods.
Overcoming the complexity of trade surveillance in the financial services sector requires a shift towards advanced technologies like AI. Compliance officers, grappling with increased regulatory demands and facing new pressures within their teams, must rely more heavily on cutting-edge technology to enhance their capabilities. This collaboration between model risk teams, compliance officers, and AI-driven surveillance tools is crucial in navigating the complex regulatory landscape. The scalable and low-latency nature of AI-driven systems positions them as indispensable tools in safeguarding market integrity and as an integral part of compliance officers’ arsenal in the dynamic world of trading.
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