Talking Trading Surveillance with Nasdaq’s Ulf Carlsson

Traders rely on technology more than ever before to access liquidity and opportunity in Asia-Pacific’s increasingly competitive markets. Meanwhile, markets themselves are starting to eye vanguard technologies as a means of boosting efficiency and equalising access. But how are regulators, and self-regulated exchanges in the region, dealing with this increased use of technology to ensure combat illicit market activity? Regulation Asia sat down with Ulf Carlsson, Hong Kong-based general manager for North Asia and Japan at Nasdaq, to discuss the latest trends in regulatory scrutiny, and some of the areas where his company aims to help them achieve their goal of efficient, unexploitable markets.

Regulation Asia: There was talk around the last financial crisis about regulators being less resourced in terms of staff and expertise. Is there more of a level playing field since then?

Ulf Carlsson: You have seen a shift since the financial crisis towards more investment into the regulators. The regulators have recruited more people from the financial industry; Hong Kong is a good example. The regulators got more funding to recruit skilled people who previously sat on the other side. Both Singapore and Australia also have very well-educated regulators.

RA: And is that true of their access to and use of technology as well?

UC: We have never seen this much activity [by regulators] to try to improve and enhance and adapt new technologies. There is a lot of investment going on in this region to make sure they are on top of things. You may never be ahead but you can play catch up much faster than you did before. That comes from the financial crisis and increased funding but also the fact it has taken time to catch up with the new types of trading activity in the market, such as HFT (high-frequency trading) and algorithmic trading and more sophisticated automation.

“You may never be ahead but you can play catch up much faster than you did before.”

Regulators have started to define this into different groups of traders, and can see if they actually perform as they set out. You can get much more sophisticated surveillance across pre-trade, on the trade and post-trade, all those phases today, in a way you did not in the past. Also cross market monitoring is a big trend, before you were focused on one market only, so only equities for example, but if you do something on one side you may gain somewhere else and if you can’t survey many markets at the same time and find the patterns then they slip through. That is much harder today.

RA: Are there any particular trends or patterns in terms of types of trades regulators are looking out for?

UC: We get that question from clients quite often and it’s nothing we can really share! But, it is interesting that you can now look at this. The founder of SMARTS, Mike Aitken has an analysis group that focuses on trading patterns all over the world. They take public data from over 100 markets and compare the trends and impacts of different rule changes, their aim is to help regulators improve their markets.

RA: How do regulators ensure anonymity until they realise a pattern of illicit trading behaviour is actually there; and once that is established you can use names? If they did name names prematurely it could be troublesome.

UC: Regulators want to understand what is going on, so do the exchanges, and the sellside. They need more sophisticated tools to really see what they are doing. Does a trader have a faulty algo or are they performing trading according to a strategy? You can, and we do on a regular basis, see problematic activity, especially when you have an event or news coming out. Then you can use tools and step days back and say: “who gained the most here, and what did they do to build up their portfolio?” You can connect these things very easily today because you can store much more data.

“Regulators want to understand what is going on, so do the exchanges, and the sellside. They need more sophisticated tools to really see what they are doing.”

We give anyone the tool, and different regulators, exchanges and compliance people have their strategies. If you look here in Hong Kong there are not that many activities that get prosecuted or heavily fined, even though the regulators have a very good idea what is going on. They must have a standard for the degree of certainty, which will differ from country to country and market to market.

RA: So how does that play out on the product side, and which areas are you looking at?

UC: In the regulatory space, we have set out on a couple of fronts to enhance our products and make sure we stay one step ahead.

The first is our investment in and partnership with a US company called Digital Reasoning, a cognitive computing company. We have exclusivity to use them in the financial market surveillance space. We offer solutions to, for example, large banks that surveils all communication within their trading departments, and we combine that with the trading data to see any patterns and create alerts. Especially since the huge fines related to Libor, etc., this has been a key area for the large global banks.

We are also looking at using machine intelligence when it comes to user experience and how you work with an application. You get a lot of alerts from trading activities, but not all of them mean there is some erroneous or illegal trading, so you need to analyse them. We now have a software we will release after the summer that will have more intuition and learning ability. The application will learn from the user what types of alerts are most important and start to sort them.

RA: That’s an area – false positives – which we see in areas such as KYC as well. Presumably machine intelligence could be used in all types of compliance functions?

UC: Absolutely. Our customers are gathering a lot of information and it has become increasingly burdensome. And, we have seen from our own exchanges first-hand the new requirements of regulatory regimes. We are looking at data in the cloud or in fast networks, with tools for alerts and to visualise HFT environments. This is also what we are using for historical analysis and finding longer term patterns.

RA: So what other technologies are you looking at, and in what spaces?

UC: Cloud is something we are very bullish on. We are investing a lot in seeing how it can save costs for regulators, not just the cost of storage, but also by running and operating markets in the cloud. We think that will be the future.

We also use blockchain technology for transaction management on our Nasdaq Private Market. The regulatory regime is often a hurdle to getting to market quickly, so a private market gives more freedom.

We also work with the New York Interactive Advertising Exchange, a completely new kind of futures exchange, which is based on a fast-matching engine. Since they are new they did not have any legacy system so had the freedom to choose. They decided on a blockchain post-trade process which has been deployed in the cloud.  Because it is a new asset class it is much easier to do.

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