Trust has become an even more significant consideration for exchanges. Surveillance has matured and is now considered a critical tool in an exchange’s trust building arsenal. Today’s fast moving markets, however, are putting surveillance models and systems to the test.

The ultimate task of any surveillance system is to preserve market confidence on a daily basis. And, as competition or listings and liquidity has increased, effective market oversight, surveillance and governance have become very tangible assets for exchanges around the world. Stakeholders must be able to trust that a marketplace can accurately and efficiently discover and handle market abuses and disruptions, such as dramatic price swings or unusual pricing patterns.

Many exchanges used to treat surveillance as a box-ticking exercise to please the regulators, says Audris Siow, Head of Business Development at Smarts Group, a developer of market surveillance systems. “However, now that competition is mounting, the style of execution has to be the best and fairest, and there’s been a paradigm shift in the attitude towards surveillance and market supervision.”

This is a view shared by Anders Ackebo, Senior Vice President and Head of Surveillance at OMX Nordic Exchange. “If surveillance is conducted properly, it will help to create public confidence in an exchange and attract listing companies and trading volumes,” says Ackebo.

From a technology point of view, exchanges have traditionally handled surveillance in-house, with many larger marketplaces initially building their own home-grown systems. But market surveillance is becoming increasingly challenging. Algorithmic and program trading have added complexity to the trading process, while overall volumes are rising dramatically. In this environment, many exchanges have found it to be more efficient and cost-effective to rely on outside vendors for surveillance technology.

At the same time, trading is becoming more fragmented. Many markets are seeing new regulations that encourage the development of new trading venues that further distribute trading and increase competition.

“As cross-border activity continues to increase, we believe there will be a greater emphasis on detecting international fraud and also on the new types of marketplaces that are being created by new regulations such as the Markets in financial Instruments Directive (MiFID) in Europe,” says Magnus Almqvist, General Manager, Smarts Europe.

Historically, the large majority of share trading in any single listed company took place on one exchange. Today, investment companies execute orders over multiple venues. This puts completely new demands on market surveillance and market oversight. Real-time surveillance systems must be complemented by checking historical data from other marketplaces in order to detect any suspicious trading patterns.

A good surveillance program will incorporate proper processes for following the flow of information and be manned with experienced staff who know how to follow through when irregularities are discovered, according to Anders Ackebo. “While technology is critical, effective market surveillance involves more than simply installing the latest platform, ”he says. “The processes in place and the people behind the system are equally important to a program’s success.”

In the past, political considerations have often prevented surveillance from being separated from exchanges. But with the rise of new trading venues there is also an increased demand for innovative surveillance solutions.

According to Smarts Group’s Siow, some trading venues are beginning to consider outsourcing the entire surveillance function. “Outsourcing not just the development of the surveillance system but also the technical operations and even the business function itself to independent specialist firms can result in technology and cost savings,” she says.

No matter how marketplaces choose to handle surveillance, one thing is certain: As competition and fragmentation increase and asset classes become more diverse, surveillance, will become even more critical to the success of the marketplace. Exchanges need to keep up.Market surveillance functions:

By Heather Mckenzie Illustration Måns Adolfsson