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Conduct and Control: Centralizing Trade Monitoring to Combat Market Misconduct

This article examines how regulators approach market disruption in the digital era, and how institutions are responding. Discover how institutions are breaking down boundaries in trade compliance, and what it means for operational efficiency.

Financial institutions today depend on market surveillance systems and internal trade controls to guard against different forms of disruptive behavior. But in the digital era, do businesses need separate solutions to address what is effectively the same risk?

There is a common thread to all disruptive market activity: conduct. As regulators take a more holistic approach to unearthing bad behavior, compliance officers need to be aware that risks and responsibilities are converging across all lines of defense – from the front office to the back.

How have changes to the regulatory regime and an increase in volume and volatility changed the landscape for risk and compliance? Do institutions need to maintain distinctions between market surveillance and trade controls?

This article examines how regulators approach market disruption in the digital era, and how institutions are responding. Discover how institutions are breaking down boundaries in trade compliance, and what it means for operational efficiency.

Conduct and Control: Centralizing Trade Monitoring to Combat Market Misconduct


A regulator’s goal is to ensure an efficient and transparent market. Meanwhile, a trader’s goal is to beat that market. Therein lies an eternal dynamic between conduct and control.

Trading is a simple proposition: buy low, sell high. Efficient, transparent markets facilitate that straightforward transaction. But the simplicity ends there. As trade volumes and complexity increase, so do the challenges of understanding what’s driving prices. Is it public information or market manipulation?

Disruptive behavior, such as “pump and dump” or quote stuffing, creates unfair and artificial trading advantages that undermine market efficiency and transparency. Market surveillance techniques have emerged to detect such abusive or evasive practices. And institutions have likewise developed internal trade controls for tracking transactions, but typically these are separate approaches to different forms of market manipulation.

Yet crucially there is a common theme to all disruptive activity: the conduct of market participants.

Both trade surveillance and trading controls seek to address market disruption. But in the digital era they should not require two separate business solutions to address what is effectively the same risk.

As increasing volume and volatility in markets, as well as tightening regulations, drive evolutions in how financial firms approach trade surveillance and controls, risk and compliance officers are also being asked to manage ever-increasing amounts of data across internal and external sources. At the same time, there’s a need to continuously update surveillance tools or processes to keep pace with core business or market growth.

To accommodate, institutions will need to address markets more broadly, with fewer boundaries between trade controls and surveillance. Institutional goals and processes should naturally align with a regulator’s aim of ensuring market transparency and efficiency.

In short, that means risk and compliance officers will increasingly own the task of spotting and stopping disruptive market conduct, irrespective of source or intent.

Front-Office Controls

“Trust, but verify” is a Russian proverb that US president Ronald Reagan adopted during the Cold War era to describe the conduct monitoring that both sides had to uphold for treaty compliance. Front-office controls at financial institutions have a similar aim: they are the “verify” aspect of financial conduct “trust.”

Across all lines of defense, tools for conduct monitoring are fundamental for safeguarding markets and preventing disruption.

Regulators globally have broad mandates to improve market conduct with the aim of protecting consumers and enhancing market integrity. This has resulted in legislation such as the UK’s Senior Managers and Certification Regime (SM&CR) and proposals from the monetary authorities in Hong Kong and Singapore to increase individual accountability.

Watchdogs are therefore taking a more comprehensive look at behavior across financial markets and institutions. Any potentially manipulative conduct is coming under scrutiny, including incentives and individual accountability regimes. The trend is towards strengthening the role and responsibility of the front office.

Institutions are responding: for instance, US bank JP Morgan is reportedly working with KPMG to improve supervision of its traders.

Conduct monitoring is becoming ever more paramount for Asia Pacific, now the world’s biggest pool of wealth, with $180.6tn as of end-2021, according to Credit Suisse. So with stakes increasingly higher and global trading access a matter of routine for firms and individuals in the region, Asia’s financial firms have come to understand that even without explicit regional regulations like SM&CR, the same concepts and spirit should still broadly apply.

Combating market disruption is an organizational responsibility for banks and brokers. Institutions need to ensure that their front office is equipped to manage associated risks efficiently and effectively. Compliance functions will continue to monitor trading activity, but it is increasingly necessary for front-office supervisors to know what transactions are occurring across products or asset classes, and how.

Each team may independently monitor conduct, but they will do so from different angles, for different reasons or to identify different behaviors.

The bottom line is that monitoring must have a view across transactions that may involve multiple trades across venues or products; it’s no longer sufficient to watch and report on individual trades or individual securities.

From a regulatory perspective, the terms “trade” and “transaction” can have overlapping meanings and interpretations, depending on jurisdiction or policy terminology. But to combat disruption across all lines of defense, institutions need thorough monitoring that can incorporate overlapping definitions with rules-based logic and information on the types of financial instruments being traded as well as how, where and, importantly, by whom.

Adopting an all-encompassing approach for trading controls and surveillance requires an integrated technological solution. Institutions’ various lines of defense can unify tools to obtain a comprehensive overview of trading activity, whether it is conducted by an employee or a customer.

The matter of converging responsibility also creates opportunity to unify monitoring systems, which is operationally efficient and cost effective.

From KYC to KYT – Conduct Is Key

Traditional divisions between trading controls and surveillance at the institutional level are becoming increasingly blurry as regulators take a more comprehensive or aggregate view of markets.

The challenge now is not merely to know your customer (KYC) but to know your customer’s trading, which will include external and internal trades—from employees or customers.

We believe institutional processes should naturally align with a regulator’s aim to support transparent and efficient markets.

What’s critical then is to know your trader (KYT)—to coin a term—as a shorthand for understanding the necessary oversight of both internal and external parties (traders). Risk and compliance officers will increasingly be tasked with spotting and stopping disruptive market conduct and a KYT outlook lets them approach conduct in a way that’s agnostic of source.

Conventional KYC discussions focus on funds and sources: you have to know your customer to know where their money comes from and whether they pose laundering risks. But taken to a deeper level, KYC or KYT also address conduct. Even if funds meet backgroundcheck requirements, conduct such as wash trading can still reveal intention and trigger alerts or enforcements.

And as most trade flow becomes direct market access (DMA) or direct electronic access (DEA), distinctions between internal or external activity are also becoming less material from a compliance perspective.

Trading – whether executed by an institution’s customer or employee – is the conduct under scrutiny and is the responsibility of compliance and front offices to monitor.

Viewing conduct through a KYT lens helps to ensure that potential misconduct does not slip through the cracks. As more comprehensive regulatory approaches trend globally, the result is a convergence of responsibility that crosses all lines of defense. The tools institutions use will have to follow suit.

One system can generate alerts for post-trade front office trade controls as well as for surveillance. Rather than building what would in practice be redundant systems to track two aspects of the same thing, institutions can gain efficiency, data consistency and cost savings by deploying a single system to capture the full spectrum of conduct.

Automation Is Still Conduct

Algorithmic trading is one example where monitoring, both from a real-time market disruption perspective (front office) and a context-based T+1 abuse monitoring perspective, is essential.

Integral to today’s electronic exchanges, algorithmic trading brings significant benefit, including wider participation, narrower price spreads and better execution overall for institutions and their customers. But it also introduces potential risks, ranging from duplicate or erroneous orders, overreaction to market events, or automation of abuse. So it’s not only human conduct that requires controls.

The London-based FICC Markets Standards Board (FMSB) published a Statement of Good Practice on algorithmic trading in 2020, and similar frameworks are likely to migrate to Asia and other jurisdictions.

Lenses of Defense

With global regulations converging on overall conduct, distinctions between how surveillance and controls are defined are becoming less meaningful or useful. The focus for all lines of defense – front office, compliance, or market surveillance – should be on trader and customer conduct.

Different teams view trading from different perspectives and use different parameters, but they do not need different systems to monitor it. After all, they have the same overarching goal.

Understanding what internal or customer traders are doing is where surveillance tools offer the most insight.

When an institution’s customer has direct access to the market, they’re also able to conduct direct abuse, including through algorithmic trading. But institutions still shoulder responsibility and need to exercise controls for managing all traders – internal or external, human or automated.

Integrating monitoring tools and surveillance regimes creates a single point of view that can spot and stop conduct much more effectively and comprehensively. Moreover, it matches the comprehensive approach that regulators are increasingly taking.

One System, Many Lenses

Institutions need to be able to view trades through different lenses depending on the region, country, exchange or asset class involved. KYT is one such lens, but there are plenty of others, and a monitoring system should be configurable for any of them.

Developing different surveillance platforms for each lens would create inefficiencies in terms of the total cost of ownership and efficacy. What one platform defines as an alert might be different to another, allowing disruptive conduct to slip by.

The more regions where an institution is active or the more asset classes it addresses, the greater the risk that market abuse will be overlooked. By layering multiple lenses on top of each other, institutions may be unwittingly narrowing their focus, or even creating blind spots.

Take Asia Pacific – a region with multiple exchanges in different countries with varying systems. Monitoring conduct in a consistent manner is particularly complicated from both an operational and regulatory perspective. Addressing the challenge with a single platform that can be tailored to any jurisdiction or definition of misconduct ultimately frees up resources while strengthening all lines of defense.

Data Flexibility Is Key

It is clear, then, that building up a single view of conduct requires extensive and varied data sources.

What’s more, for all lines of defense to monitor the same conduct, they ideally should work with the same data in the same formats; they all need to speak the same language technologically.

At the same time, trade data will be required across other institutional functions. Each of these may come with different management regimes or processes.

As a result, flexibility is an operational requirement; a surveillance system should be able to address and accommodate the full spectrum of an institution’s data needs and protocols. While this is not a direct concern of the front office or surveillance teams, understanding wider institutional needs helps unify solutions, reduce costs and increase overall efficiency.

Selecting a system that can align to the business case as well as the regulatory one is a crucial factor when considering trade monitoring or surveillance systems. Deploying a singular system helps address cost of ownership issues that institutions must consider from operational perspectives beyond their compliance needs.


As regulators globally take more comprehensive approaches to combat market disruption, the conduct of both the staff and customers of financial institutions is under increasing scrutiny, and institutions themselves are under growing pressure to have surveillance and controls in place to spot and stop market abuse.

While markets are growing in size and complexity, the digitization of financial institutions’ systems and processes makes monitoring trading conduct more achievable and practical.

Even in the absence of local rules on trade monitoring, we recommend institutions be proactive about implementing integrated and flexible surveillance and control systems that can bolster all lines of defense. Such action will prevent them being caught on the back foot when authorities do adopt global trading standards or guidelines.

New regulations consistently lag financial or technological innovation by months or even years. Financial watchdogs study issues carefully before setting and enforcing new rules. But with the global nature of finance, industry players can observe the spread of regulatory trends between jurisdictions. What we’re seeing now is a rapid move toward a convergence of responsibility across all lines of defense. To accommodate the shift, institutions should look to a single system that can address markets comprehensively, with fewer boundaries between trade controls and surveillance.

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