Why aren’t more firms monitoring social media to detect insider trading?
By Helen Bevis, Head of Operations and Strategic Partnerships, SteelEye
Insider dealing/trading is one of the biggest triggers of market abuse today and has been a prominent risk during the current pandemic as those with access to confidential information have transitioned to remote working. At the height of the lockdown, studies showed that the majority of traders were accessing their trading technology remotely, with almost 60% of FX traders working from home. This is concerning because of the possibility that material non-public information (MNPI) could be overheard, discovered in the trash, or inadvertently disclosed in other ways.
Of course, we are now seeing a gradual shift back to office work, but that does not necessarily reduce this risk. On the contrary, working in part from the office and from home doubles the number of locations in which authorised persons can access insider information, increasing the risk of illicit or accidental disclosure. So how do you control and mitigate for insider trading risks? The answer, in part, is the use of social media and news in monitoring market abuse.
The UK Financial Conduct Authority (FCA) has stated that it expects the combination of financial service employees working from home, alongside high levels of crisis-driven corporate fundraising, to create the perfect storm when it comes to insider dealing. If we look at the period from January to the beginning of July, organisations globally have raised $5.4 trillion in capital, including $3.9tn since the start of March. With this scale of fundraising in such unprecedented circumstances, significant volumes of MNPI will have been handled every day, often by employees working from home.
Since the beginning of the lockdown, global regulators have been urging financial firms to enhance their trade surveillance activities to ensure they can detect instances of intentional or unintentional disclosure of insider information. But doing so in practice can be construed as more complex than it needs to be. Of course, technology and automation play an important role in enabling firms to get ahead of market abuse within their organisations, but another important aspect, which is often neglected, is the use of social media and news for detecting insider trading.
So why is the inclusion of social media and news in market abuse detection a vital practice that all compliance teams should adopt? By ingesting news and social media in a firm’s market abuse algorithms, trades being conducted in advance of information appearing in the public domain can be instantly highlighted and help teams to quickly investigate if there was any wrongdoing. For example, imagine if a trader places a particularly large order on a stock she normally does not trade in, moments before the company makes an announcement expected to influence the share price positively. Global affairs data would in this case provide the necessary context needed to flag the trade to the compliance team for investigation. The use of news and social media can also help firms fine tune their alerts and reduce false positives as they will be considering more data and therefore produce more accurate results.
However, despite the clear use case of news and social media data in generating more relevant and accurate MAR alerts, and the significant reputational and commercial risk accompanying leaked information─ as evident in recent Goldman Sacs and Citadel Securities cases ─ the practice is still largely regarded as a ‘nice to have’ and not a necessity, only prioritised by those with large enough compliance teams and budgets. And while we are seeing a tightening of the rules around market abuse across the globe, with statements from the FCA about the requirement to proactively monitor for insider dealing in this new environment, one could argue that there is not enough pressure on firms to incorporate this important data set.
What we do know is that to effectively monitor and detect insider trading, compliance teams need to quickly and clearly understand how trades relate to a greater context, which requires access to news and social media data. Financial services firms will need to raise their game when it comes to the detection of insider trading as pressures rise on the back of the Covid-19 pandemic. Implementing news and social media in their MAR compliance programmes gives firms increased agility to detect and investigate signs of market abuse, enabling them to better protect their reputation, keep positive regulatory relationships, and reduce their commercial risk.
About Helen Bevis
Helen Bevis is the Head of Operations and Strategic Partnerships at SteelEye and has over 21 years of experience in compliance & trading within the financial sector. Throughout her career, Helen has worked within tier 1 Investment Banks, Asset Managers and leading Technology Vendors and has a strong background in banking and trading floor technology.