Since July 2016, compliance departments have been struggling to understand, detect and prevent Market Abuse all over EU. One side of the story is surely lack of regulatory details and best practices regarding the detection and prevention.

As of December 2018, we can estimate that most financial institution subject to MAR have not or only partially have met regulatory requirements. This challenge can be summarised as following:

  • Trade Surveillance teams are understaffed and thus Market Abuse is not taken seriously.
  • Hundreds of MAR alerts are triggered per user per day by different surveillance systems. (In some very bad cases, even more) From these only 0,5 % or so resulting in STORs. In most cases, there does not exist a risk-based methodology which will address the most critical cases first.

Whilst, to resolve the first issue there is a clear need of raising awareness at senior management levels of the risks MAR can bring to the entity, At GK Consultancy, we believe we have found the way to efficiently tackle and resolve the 2nd issue with high probability of success.

“Know Your Trader” is a methodology which we have established replicating our subject matter expertise in all three of the domains: Trading, Trading Surveillance Software Implementations and Compliance. The idea of the methodology is to address Market Abuse Surveillance in a risk-based approach, meaning, identify highest risks and resolve them first. Now, in order to be able to identify where the highest risks are, financial institutions having retail trading flow have to know WHO they are dealing with. This can be a challenge especially for those retail brokers who serve hundreds of thousands and in some cases millions of traders.

In order to really answer this question, compliance specialists must have following information:

  • Trader’s Transactional Profile
  • Trader’s Alerting Profile
  • Trader’s Social Profile (incl. KYC)

We believe that the key to successful detection and prevention of market abuse lies in profiling of the trading entity (whether individual or legal). Compliance at all times must be able to have answers such as what asset classes are being traded? What is the average holding period? What is overall performance? How does average win compares with average loss? What is the Win Rate? etc.

From the Alerting History perspective, compliance analysts must know the dynamics – how have the numbers of alerts evolved over time for this particular Trader? What kind of alerts has he/she mostly triggered? Can we explain this behaviour? etc.

Trader’s Social Profile can be a very strong tool to identify hints of potential intent for insider dealing or other types of conflicts of interests. Social Profile includes information about the trading entity from Internet and social media (Linkedin, Xing, etc.). In addition to this, market integrity teams must know whether the trader they are looking at is happen to be a relative of a PEP or otherwise related to Special Interest Persons or Entities. This can be revealed by connecting the dots between Customer Screening Tools and Market Abuse Detection tools.

Once the specialist has gathered all this information, the secret keys are located in understanding the deviations from the “normal”. Thus, the point of the profiling is to establish the “Normal”, so the investigator can grasp quickly what “abnormal” is or can be.

At GK Consultancy, we have made first steps and started automating this methodology into “KYT Card” Tool. This is an automated solution which gathers all above mentioned profiling information (including Peer Comparison via Machine Learning techniques) and displays it in a user-friendly way for the analysts and investigators to allow them make risk-based decisions.

Whilst the implementation of this tool can differ from Brokerage to Brokerage, Bank to Bank – the ultimate idea which we strongly defend at all times is that the investigator must be able to get the KYT dashboard in under two clicks and few seconds displayed in front of him.

If you are interested to hear more about this, please, let us know. Via our trainings on Market Abuse you can get to know the methodology. For inquiries regarding the “KYT Card” Tool, please, contact us directly at: info@gk-consultancy.de.

Best,

GK Consultancy