Robust trade surveillance program reinforces market integrity in digital asset markets

Digital asset venues are finding that a robust trade surveillance program reinforces market integrity and attracts investors used to operating in more transparent environments, according to regulatory expert Joseph Schifano.

Schifano is the global head of regulatory affairs for Eventus Systems. He said, “Those venues looking to appeal to institutional participants aren’t waiting for a regulator to tell them to do this; they’re identifying opportunities for implementing best practices, establishing rules and actively surveying activity — being proactive.”

He continued by mentioning financial exchanges in established asset classes – equities, options and futures for example – have a well-defined process for trade surveillance and related best practices.  They have an understanding that market integrity is ‘paramount’ to attracting and retaining liquidity is ‘baked in’. These market participants also know the markets require sound regulatory processes and systems, so they don’t run afoul of regulators.

In contrast to established asset classes, digital asset markets are fairly new – therefore regulatory structures are only beginning to take shape, with still very few traditional intermediaries. According to Schifano, there aren’t many differences in regard to trade surveillance for digital assets compared to traditional assets. However, he said there are key distinctions that impact the surveillance effectiveness for digital assets – these include: market structure, technology, data activity coverage and culture.

Market structure

Market structure is one area where digital assets diverge from traditional markets, Schifano claims. He noted the ‘significant headwinds’ to institutional acceptance include the array of venues, unrelated jurisdictional mandates and lack of regulatory clarity.

An example of this given is potential fraud on digital asset venues which is cited by US regulators in rejecting a cryptocurrency ETF, while two ETFs were recently approved in Canada. This, Schifano noted, is why the industry – from a trade surveillance standpoint – needs to pay close attention to critical distinctions in market structure that impact the effectiveness and coverage of any trade surveillance program.

Schifano remarked that perhaps the most critical aspect of the digital asset trading market structure was the lack of traditional intermediaries. For example, in equities and futures, surveillance regimes exist at all levels of the ecosystem. Without intermediaries assuming similar responsibilities in digital assets, the responsibility is then put squarely on digital assets venues to detect and deter manipulative behaviour.


With the digital asset markets being 24/7, many digital assets venues are conducted surveillance in real-time. Schifano highlights this requires ‘tremendous’ performance from an organisation’s surveillance platform due to the high amounts of transaction and market data.

Some venues still face challenges using on-premise solutions due to cybersecurity and privacy solutions. However, cloud solutions are commonly found to be more cost-effective and flexible – with many venues able to handle 2-3 billion messages per day, in real-time, in the cloud.

According to Schifano, the historic approach to a trade surveillance procedure might be to write a program to find violation X, with the program only needing to that. He said the industry has moved away from this approach as there are too many variables and too much data – regulators want the exchanges to cast a wide net and show how alerts are reviewed/mitigated.

Schifano said therefore that both ready-to-use and customisable surveillance procedures are critical as market venues want the means to create and amend procedures quickly. In addition, in many cases, they want self-control over their surveillance procedures in a more technical fashion.

Data and activity coverage

As digital asset markets evolve, surveillance platforms must be versatile and cover a wide range of data and activity segments – while those overseeing this should be prepared to rapidly amend and improve their reports and procedures.

Schifano states therefore that datasets must expand and involve client data, account transaction information and money flows – this also ties in with the discussion regarding a lack of intermediaries and the pressure to intercept bad behaviour. Compliance staff and surveillance platforms must also be able to quickly adapt to changing behaviour and stay ahead in a fast-moving environment. Therefore, detecting anomalistic behaviour is a ‘critical’ way of staying ahead of the curve, Schifano claims.


Lastly, Schifano said technological advancements in the digital assets space transcend legacy surveillance methods – therefore many of those hired to operate surveillance mechanisms are quite skilled in coding and new technologies as well as not being completely accustomed to regulation and market structure.

He mentioned this potentially opens the doors for regulators and venues to work together, learn from past market structures and develop a surveillance and regulatory regime appropriate for the new digital assets market.

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