Covid-19: A New Era for Trade Surveillance

As traders across the globe continue to work from home, traditional surveillance and monitoring systems are being put to the test.

Some fear that, as traders are able to execute trades from their living rooms, out of the direct sight of compliance departments and risk managers, malignant behavior could flourish. These new ways of working may also prompt new ways of thinking about surveillance standards and best practices.

Jack Miller, global head of trading at Baird Trading, says it’s hard to remember that just a few months ago it would have been unheard of to have traders working from home. 

However, even though financial firms have adjusted to running their businesses remotely, the new circumstances raise questions around surveillance and privacy, and answers to those questions may not be obvious for a long time to come.

Miller says proximity to other people and working in a group provide a sort of built-in safeguard against malpractice. Just being able to walk past a colleague’s desk every day can provide clues to what is happening in their lives and heads. “You have to find different ways to get that context now,” he says.

Prior to Covid-19, firms would have had to register remote working locations as branch offices with the Financial Industry Regulatory Authority (Finra). In March, Finra provided a temporary reprieve, allowing traders to work remotely by waiving certain reporting and record-keeping obligations and compliance visits for branch offices.

However, these regulatory constraints will come back into force, and businesses must then decide whether they will continue to operate this type of environment. Baird itself is used to having a distributed workforce, with headquarters in Milwaukee, Wis., and another hub in New York, but even so has found that adapting to a “single office” system has had its challenges.

If a large number of banks and trading shops decide to keep working remotely—maybe even putting entire states or coasts between themselves and their colleagues—while others go back to their offices, there could be implications for the financial world’s conservative, handshake-driven culture.

Miller says regulators and firms could take a fresh look at rules and customs, asking what is really required of employees from a risk management perspective.

Not ‘When’ But ‘If’

Chris Wooten, executive vice president of NICE Actimize’s surveillance group, says the industry will find out how well it has surveilled and monitored itself during the crisis in 12 to 18 months.

He echoes Miller in saying that a major theme running through customer conversations is not when or how traders will go back to the office, but if they will go back at all.

“Some things we’re starting to talk about are how we make sure that our traders aren’t engaging in risky behavior,” Wooten says. “And it’s not just our traders—it’s anybody who has information about an order and execution, or has access to non-public personal information (NPI). How are we going to address risk in this new world?”

Many of NICE’s client conversations at the moment center on surveilling voice communication much more aggressively, because employees committing market abuse or fraud often talk about what they’re going to do before they do it, or they brag about what they’ve done afterwards.

The other main talking point with clients is behavior. Banks sit on a treasure trove of trader behavior data dating back to the 2008 financial crisis—data that banks have to hold for now, as regulators have said they may one day ask for it. That data can help to compose trader profiles and contrast behavior patterns. Different traders’ patterns can be combined to make more nuanced connections, such as to see who has worked historically with whom, whether certain counterparties made risky decisions in the past, and if they’re now working together again.

“Maybe in the past they placed a few phone calls before they actually executed an order. And we start to see trades happening that don’t have a preceding call to them. That’s a very simple example. But there are all kinds of different ways we can mine that data to start looking at past activities, and compare them to what the activities are now to start looking for anomalous behavior,” Wooten says.

Trying to monitor traders working from home will create gaps because it is not a sterile environment, Wooten says. They have round-the-clock access to personal computers and cellphones, which are out of reach of surveillance systems and risk departments.

Is the future of surveillance a more intrusive one? Wooten is doubtful. Various large, powerful organizations stand at the ready to fight encroachments on civil liberties, and any formal court proceedings would likely play out for much longer than the pandemic does.

However, Miller says privacy generally is a thing of the past.

“It’s being eroded all over the place. And boundaries that we used to rely on, you can’t count on them anymore. We’ve all been moving in that direction. The blurring of work and home—for generations, that’s been a bit of a theme,” he says.