Trading today is more accessible than ever before. The Robinhood trading app officially launched in March 2015, and headlines from 2020 indicate that it’s already handling more trading volume than rivals Charles Schwab and E-Trade combined. Robinhood also spurred the move toward commission-free trading, which has become industry standard as a result.
Equities did well last month as most market watchers have noted that Value outperformed growth. In his March Factor Performance report, Alex Botte of Venn by Two Sigma noted that March was a strong month for the global Equity factor, especially in developed markets. Q1 2021 hedge fund letters, conferences and more He said Europe Read More
Ease of access isn’t the only trend that has traders flocking to the markets. An interesting and volatile market has become a byproduct of the COVID-19 pandemic. People have more time on their hands. No one’s really commuting, for one thing. And they’re using this extra time to, in part, not just trade online but to discuss trades online. Just look at how a group of Redditors made big news by sending GameStop stock sky-high. Several high-profile and high-performing IPOs have made recent headlines as well. As a result, the market itself is in the news; it’s no wonder employees are increasingly entering it to trade on their own.
As a broader group of employees puts money into the market, old monitoring strategies will no longer suffice. Compliance teams have traditionally focused trade monitoring efforts on specific cohorts of high-risk individuals such as professional traders and bankers — people who typically have access to a lot of material nonpublic information (MNPI). Now, as employees in departments such as operations and technology open brokerage accounts for the first time, financial firms face an expanding risk vector and a more complex landscape for surveillance and monitoring.
How Can Compliance Officers Keep Up?
Many firms still rely on manual or semi-manual processes for employee trade monitoring, but this approach is simply not scalable enough to maintain regulatory compliance in the present and future of heightened activity. Technology can fill in the gaps to help monitor an increasing number of users and trades.
As financial firms increase compliance resources to accommodate the volumes of employee trading, their practices and technology need the following capabilities to ensure effective and comprehensive monitoring:
Enabling Holistic Oversight
Manual monitoring processes are most present in smaller firms with fewer employees, but even larger firms that rely on software still lack truly comprehensive solutions for trade surveillance. Instead, they often have multiple systems bolted together to handle different tasks.
Holistic solutions, on the other hand, allow compliance officers to see a full overview from one centralized location, increasing visibility and reducing the room for error. Truly holistic software will provide automated pre-clearance, the ability to cross-check trades with restricted lists and blackout lists, broker-feed coverage with daily data updates to match pre-cleared trades with actual executed trades, and capabilities to research questionable trades against market news. By aggregating employee trading data with publicly available news and MNPI, holistic solutions make it easier than ever to know insider trading when you see it — no matter who’s doing it.
Automating Employee Trade Monitoring Workflow For Scalability
Whenever possible, it’s important to eliminate manual tasks in favor of more scalable solutions. Without the right trade surveillance software, for instance, compliance officers must manually track down, reconcile, and key in brokerage statements from any third-party trading platforms employees might be using. But software can sync with those brokers and automate the intake of electronic broker feeds. This automation eliminates the need for paper broker statements and significantly decreases the time in which compliance gains access to executed trade data — from once a month, say, to once a day. This is just one example of automating an employee trade monitoring workflow to enable greater scalability as the volume and complexity of employee trading activity in your organization increases.
Essentially, software simplifies the vigilance necessary for compliance. The best trade surveillance software will contain features such as anomaly detection along with other advanced tools that make spotting unusual activity an automated process. It can also create prioritized groups or identify pockets of increased risk that might warrant a deeper manual investigation.
As more employees in the financial industry join the ranks of retail traders around the world, it’s important to implement trade surveillance solutions that help you ensure these employees aren’t using MNPI to make illegal trades for their own gain. The increasing number of these traders, combined with a growing landscape of commission-free platforms for trading, has made compliance a complicated affair. To close the gap and meet compliance needs now and into the future, financial organizations will need to turn to technology built around compliance automation.
About the Author
David Rowland is the chief technology officer at StarCompliance. He draws on nearly 20 years of experience running large organizations and delivering tech solutions across a variety of banking businesses to drive Star’s product and solution delivery to market as well as the firm’s internal corporate technology.