Trade surveillance
Also called market surveillance, trade monitoring
Trade surveillance is the monitoring of orders and transactions to detect market abuse, such as insider dealing and market manipulation. Firms that arrange or execute trades run automated alerts on order data, investigate them and report suspicions to the regulator. In the UK and EU the report is a suspicious transaction and order report.
How it works
Surveillance systems ingest every order, amendment, cancellation and execution. Rules and models look for patterns such as spoofing, layering, wash trades and trading before price-sensitive news. Analysts review alerts, pull related communications and decide whether reasonable suspicion exists. If it does, the firm files a STOR without delay.
Under the Market Abuse Regulation, firms must have effective arrangements, systems and procedures to detect and report suspicious orders and transactions. Coverage must include orders as well as executed trades. Regulators have fined firms for gaps in surveillance coverage, even where no abuse was proven. Trade surveillance increasingly links with communications surveillance to give context to alerts.
The rules
Article 16 requires effective arrangements, systems and procedures to detect and report suspicious orders and transactions.
Persons professionally arranging or executing transactions, and trading venuesSets technical standards for surveillance systems, staff training and the STOR template and submission process.
Firms and venues subject to MAR Article 16Keeps the Article 16 duty to detect and report suspicious orders and transactions, with STORs filed to the FCA.
UK firms arranging or executing transactions and UK trading venuesCommon questions
What is a STOR?
A suspicious transaction and order report notifies the regulator of an order or trade that may involve insider dealing or market manipulation. Firms file it without delay once reasonable suspicion arises. In the UK, a SAR to the National Crime Agency does not satisfy the STOR duty.
Does trade surveillance cover orders that were never executed?
Yes. MAR covers orders as well as transactions, including cancelled and amended orders. Spoofing and layering rely on orders that are placed and then withdrawn, so surveillance that only looks at executed trades misses them.
Which firms need trade surveillance?
Under MAR, any person professionally arranging or executing transactions, such as brokers, banks and investment managers, plus operators of trading venues. Coverage should match the firm's business and the instruments it trades.
How does trade surveillance relate to communications surveillance?
Trade surveillance finds suspicious patterns in order data. Communications surveillance reviews emails, chats and calls. Combining them helps analysts see intent behind a trade and decide whether reasonable suspicion exists.
