Inside the Trade Surveillance Market ~ Key Innovations & Future Trends

May 2024

Fintech & Payments

Daniel Bedford

Senior Research Analyst

As new regulation puts pressure on financial services firms to proactively identify insider trading, misconduct, and market abuse, trade surveillance systems have become an emerging area of interest within Regtech.

Trade surveillance systems monitor and analyse trade activities, including orders, executions, and other trade-related data; with the goal of identifying potential violations of internal policies or regulatory requirements relating to trading activities.

Given the likely importance of trade surveillance systems to the future of financial services, we have compiled some insights on the key players, technologies, and trends that are driving this nascent market - and how it may evolve in the coming years.

What's Driving the Trade Surveillance Market?

One key driving force in the trade surveillance market is tightening regulations, such as MAD (Market Abuse Directive) and MiFID II (Markets in Financial Instruments Directive II) that demand mandatory compliance and reporting from registered trading firms.

These regulations require financial institutions to monitor their employees’ trades in a manner that allows them to collect data and ensure that they do not form a conflict of interest with their clients or rely on inside information. This aims to help spot potential market abuse and keep captured records of various conversations surrounding a trade, to allow a restructuring of events if investigation is required. These regulatory shifts highlight the demand for advanced trade surveillance technology.

Another key driver in the trade surveillance market is continuous advancements in next generation such as AI (Artificial Intelligence) and machine learning. For instance, SteelEye’s AI-driven assistant, Compliance CoPilot, can unlock efficiencies for compliance teams, by providing intelligent alert scoring, triaging, and automation. This solution keeps human decision-making at its core, but through AI and automation, it effectively reduces workloads, boosts productivity, and precisely identifies risks that threaten financial institutions.

Source: SteelEye

Who Are the Key Innovators? 

One key market player is SteelEye, who is recognised for its trade oversight, communications surveillance, and archiving for reporting compliance. Its trade surveillance module allows its clients to analyse their trading activity and monitor for a wide array of manipulative practices including insider trading, spoofing and, and wash trading. 
 
SteelEye was founded in 2017 in London, and since its inception has amassed $45 million in funding, becoming a flourishing organisation with over 100 employees. SteelEye has over 140 clients worldwide including the likes of Kyte Broking and their strategic partnership with Wealthtech Enfusion. which integrates its solution into their asset management platform.

SteelEye’s platform can integrate and connect large volumes of data and apply automation, to simplify trade surveillance and enable users to meet market abuse monitoring demands more efficiently and accurately. Its trade surveillance solutions enable its clients to strengthen their risk detection, provide comprehensive oversight, and continuously demonstrate compliance.

What Are the Market's Biggest Challenges?

The sheer volume of regulatory requirements relating to market abuse and MiFID II can cause headaches for compliance teams, where tracking, archiving, and analysing all information requires a large number of resources and time. This becomes increasingly complex when factoring in that MiFID II requires traders to capture information on all trades, including ones that have been initiated but have not happened. 

Furthermore, personal mobile phone use is increasingly common in the trading space, and to comply with MiFID II, the ability to record conversations regarding transactions needs to be installed on personal devices as well, which can prove tricky.

On the other hand, the pandemic and creation of work-from-home culture saw an explosion of communication channels and market data. This has created a proliferation of digital transaction modalities and hybrid work environments, which reduces visibility into the trading process. To capitalise on this pain point, SteelEyes’s architecture readily integrates data from 85 voice, social, video, and collaboration tools, to provide enhanced communication surveillance, by archiving, validating, and indexing structured and unstructured data from a wide range of channels.

What Does the Future Hold for the Trade Surveillance Market?

This explosion of communication channels has created an increase in the volume of data needed to be processed by surveillance systems. To improve accuracy and productivity, this new data can be utilised to train new surveillance tools such as large-language models and natural language processing.

We anticipate the deployment of cloud infrastructure that enhances the capabilities of trade surveillance platforms by providing scalable solutions and cost-effective data storage. To be successful, cloud-based systems must facilitate collaboration among financial institutions and regulators. This is vital to promote information sharing across all stakeholders and enable them to operate with collective insights.

Daniel analyses developments in financial and payments markets, and how these interplay with emerging technologies, such as blockchain and AI. His recent reports include Anti-money Laundering Systems, Banking-as-a-Service, and Regtech.