News & Views

Shadow War Between Rogue Traders and Surveillance Firms May Decide Traders’ WFH Fate

Shadow War Between Rogue Traders and Surveillance Firms May Decide Traders’ WFH Fate

By Jason Dibble

Changing trading logistics during the coronavirus pandemic have created opportunities for rogue traders, spurring a spate of warnings from regulatory agencies as suspicious behavior spikes.


But with regulators hampered by their own remote-working arrangements, software firms must rapidly adapt to a seismic shift in the trade surveillance landscape to preserve traders’ newfound WFH flexibility.

Rising Activity

Coronavirus chaos is giving rogue traders cover in their never-ending shadow war with regulators and trade surveillance firms. Remote work is allowing them to operate away from the prying eyes of bosses and colleagues.

At the same time, extreme market swings have sweetened the pot for rogue traders by raising the specter that trading on material nonpublic information could yield a huge payday.

Heightened volumes and volatility have meanwhile left compliance staff awash in a sea of alerts — a trend furthered by relaxed home-working environments where red-flag events like cursing and use of unauthorized communication channels has ballooned.

Greenwich Associates said one global banking client logged 35,000 false positives on a single trading day in March, compared with 5,000 on average. In some cases, compliance staff took two to three weeks to review alerts normally evaluated on the same day.

Trade surveillance software firm Behavox has seen an 18% jump in negative sentiment including cursing and complaining on its platform since traders began working remotely. The trend is a “leading indicator of future misbehavior,” the firm says.

Behavox has also logged an 8% uptick in client confidentiality breaches — a bump it says raises the risk of “household members trading on inside information they may overhear.”

And the SEC received about 4,000 whistleblower tips from mid-March to mid-May — a 35% YoY increase likely attributable to a spike in illicit activity, an increased feeling of security for remote-working tipsters, and a recent surge in whistleblower payouts by the SEC.


The alarming figures have prompted a shift in approach by regulators. After initially “easing a rule that all conversations be recorded,” they’ve since warned industry participants that transgressions will not go unpunished. In March, the SEC took the unusual step of warning corporate executives against insider trading.

Last week, the UK’s Financial Conduct Authority cautioned financial firms they were still responsible for “maintaining robust market surveillance” during the pandemic and may need to review their systems to ensure robust coverage of remote-working activities. Earlier in May, the FCA had warned insider traders they “will be caught.” Travis Schwab, CEO of Eventus Systems, said, “there is a real risk here of regulators increasing their use of ‘Failure to Supervise’ because of firms not being able to follow their normal written supervisory and testing control procedures due to everyone working from home.”

Those public warnings could signal regulators’ struggles to cope with a spike in potential illicit activity in the throes of the coronavirus crisis. SEC staff will work from home until at least mid-July, and numerous initiatives have been postponed as the agency triages the most pressing crisis concerns.

Delays and outages have also hamstrung the SEC’s efforts to monitor trading electronically. The Consolidated Audit Trail project designed to give the agency an oracular real-time window into daily trading activity has been delayed until 2022 and faces privacy concerns on Wall Street.

The Midas system regulators currently use to pore over a billion daily records from exchanges’ proprietary data feeds has meanwhile “broken down at times when trading volumes surged or unusual trading roiled markets,” according to The Wall Street Journal.

Rapid Adaptation

Those dynamics suggest financial firms and regulators are struggling to adapt to coronavirus-driven changes in trading activity from surging volumes to remote work that are launching a “new era for trade surveillance.”

Firms have responded in part by reaching deeper into financiers’ lives, piloting tech to monitor WhatsApp messages and mulling asking employees to disclose whether any member of their household works for a rival. JPMorgan even fired a credit trader who used WhatsApp to “discuss market chatter with other trading employees” and cut bonuses for his team.

But for compliance departments and regulators alike, a surge in alerts — the vast majority of them false positives — is gobbling up resources and hampering their ability to ferret out bad actors.

As regulators seek to re-tighten the surveillance screws they loosened at the height of the coronavirus crisis, the future of remote work for traders hinges in part on whether providers of trade surveillance software can filter out enough false positives to make remote trading sustainable before the window of opportunity has closed.

They’re already working on using AI to do just that. Singapore Exchange said in February it was working to implement AI in its surveillance software to “generate higher quality alerts,” filtering out the noise of false positives. Last summer, Nasdaq incorporated machine learning into its surveillance system to “spot previously unknown methods of illegal equities trading” — the first time it had used AI on its US equity market.

Such endeavors could give a boost to surveillance software providers including exchanges. Their offerings, once viewed as pure regtech, could open a gateway into cost-cutting for firms willing to allow traders and other employees to work remotely over the long term.

For traders, that development could one day break the tie that binds them to the trading floor — provided they play by the rules.


Reprinted with permission from Curatia


Eventus Systems, Inc. offers Validus, one of the leading global trade surveillance and market risk platforms.  Available as a real-time or T+1 cloud-based or on-premise solution, Validus provides sophisticated market surveillance and financial risk capabilities, enabling clients to solve some of the most pressing regulatory challenges. For more information, contact us at info@eventussytems.com