The Three E’s for The Modern Compliance Department

In early February, the CME Group broadened its spoofing rule to include attempted spoofing, and increased the amount of potential fines for disruptive trading activity and attempted market manipulation. Not only did this news catch my eye, but it confirmed what I have been expecting to see for a while: the CFTC is starting to put increased pressure on the exchanges to detect and punish illegal trading activity. The CME is not the only derivatives exchange that has been feeling the pressure from the CFTC, as ICE has been mandated to speed up their investigations of market manipulation as well.

Craig Pirrong, a finance professor at the University of Houston, told Reuters, that under the new rules, theCME will have more latitude to pursue spoofers and other rogue traders. It is more clear than ever before, that compliance officers at trading organizations of all kinds must be thinking about the most effective ways to ensure that their traders are playing by the rules.

As a former CCO with about 10 years of experience on both the regulatory and business sides of the industry, I believe it is more critical than ever that compliance professionals take a proactive approach to protecting their company from costly regulatory fines and the reputational damage that comes along with them. Here are a few of my recommendations for todays compliance professionals: I call them the Three Es.

  • Education – Increase the frequency of training:It is critical that traders are up to speed on new regulations and the disciplinary actions by exchanges on which they trade. Educating your traders annually just will not fit the bill, however, you also dont want your traders too distracted from their daily work. It is up to CCOs to be creative and develop efficient yet effective methods for ensuring that their traders understand the mechanics of the rules that address disruptive and manipulative trading practices, as well as the severe consequences that accompany violations of those rules.
  • Evaluate – Your firms pre-trade risk controls:Pre-trade risk controls come in many forms, including messaging throttles, quantity limits, and kill switches. However, another way to enhance your firms pre-trade risk controls is by simply interviewing your traders on a regular basis about their trading strategies to ensure that they are fully aware of the rules and regulations important to the markets they trade in. If the traders are taking the rules into consideration when developing or modifying their strategies, then you have pro-actively reduced the amount of regulatory risk that your firm will ultimately be exposed to.
  • Execute – The usage of modern trade surveillance tools:With the broadening of the rules by the CME and the increase in potential fines, it puts the onus on CCOs to quickly make the change to modern trade surveillance technology. Now is the time for compliance teams to ensure that their trade surveillance solutions can be relied on to flag potential market manipulation and disruptive trading practices. Arecent Bloomberg articleconfirms that even the CFTC is pursuing private companies that use artificial intelligence to recognize fraud that isnt necessarily easy to spot. Utilizing state-of-the-art surveillance solutions that leverage machine learning technology in near real-time is what I believe is the way of the future in regulatory compliance technology. Legacy solutions that maintain a rule-based approach have proved to elicit too many false positives and allow fraudulent trading behavior to slip through the cracks.

Jay Biondois Director of Surveillance Products Design at Neurensic