The Financial Conduct Authority issued Market Watch 67 , which covers what the UK regulator does with the “approximately 150m order book messages” it receives per day, writes Sam Tyfield, partner at law firm Shoosmiths.
Processing those data is no mean feat, even if the “wins” the FCA highlights are not all that terribly ground-breaking and with the FCA noting the way some orders are reported (“mapping short-to-long client codes” incorrectly) makes its job more difficult. The clear implied message to market participants, venues and even those which provide “reference pricing” is that the FCA is watching them and their participants even if they are not doing so.
There are two interesting points raised specifically by the FCA.
1. Once the FCA had identified what appeared to be an abusive trading strategy (at an algo firm), its investigations led it to understand that there was no intent and with an “adjustment” to the execution algorithm and the firm’s control framework, the “harm” was removed. There is no suggestion of enforcement action taken against the firm. If that is true, this is a good thing: as I have mentioned (no doubt ad nauseam) before, technically a failure of a system (intentional or unintentional) to prevent an unfair or disorderly market is an enforceable breach by the system operator. That (to my mind) was, is and always will be a nonsense.
2. When the FCA followed-up reports of suspected spoofing of European Government Bond Futures, the individual trader was dismissed for gross misconduct “after being found to have breach a number of [his/her employer’s] internal policies”. My reading of that is that the FCA nolle prosequi’d the employer itself. It must have had absolutely water-tight training, certification and policies (and also surveillance systems which could not reasonably have caught this behaviour). Anything less would have resulted in the employer being at fault also.
There is an additional point to note, which all firms should consider. The FCA has had the luxury of being able to build a surveillance system which is “fit for purposes”: it takes the raw order book data, “blends” it “into a single holistic view of market activity” on which it can apply proprietary surveillance tools. Very few market participants have that luxury: there are numerous legacy systems built or acquired at different times, for different purposes which require data to be captured in their own way, which (probably do not) speak to one another and which do not have the benefit of cross-asset, cross-market and cross-user visibility.
It reinforces the point above – if you do not capture the data, the FCA most likely will (now or eventually) and will wonder why you did not. Also remember that if the FCA’s surveillance systems fail, they do not answer to you, but if yours do, you will most certainly answer for it.