The Financial Conduct Authority (FCA) has reminded firms about the significance of data integrity and algorithmic governance in market abuse surveillance tools, as outlined in its Market Watch 79.
This reminder serves as a crucial focus area for investment firms employing automated market abuse testing, ensuring compliance oversight of these systems considers the quality and sensitivity of the data.
ACA, which offers scalable compliance, risk and technology solutions, has explored what the market abuse regulation responsibilities.
Under the Market Abuse Regulation (MAR), firms are mandated to have effective controls to detect and report suspicious trading activities. With the increasing reliance on automated methods for market abuse testing, compliance teams now utilise these tools across extensive trade data sets in real-time. However, the efficacy of these tools is contingent on the quality of the data, controls, and tolerances embedded within them.
The FCA’s Market Watch highlighted several core issues, such as whether automated tests were properly back-tested with real trading data and if the tolerances were set at appropriate levels relevant to the firm’s trading frequency and strategies. Deficiencies noted included missing alerts due to unaccounted trading segments, inconsistencies in flagged trades, and inadequate testing of specific abusive behaviours during the setup phase.
Notably, the FCA observed that firms often take weeks to months to address these issues, with the identification of problems in market abuse surveillance testing being a significant challenge. Competent compliance and operations personnel are crucial for challenging data quality and findings, leading to meaningful remediation and proportionate testing outcomes.
A common red flag identified during client meetings is when firms have not reviewed the basis for their tests despite changes in investment strategies, platforms, news, and price feeds. This lack of review undermines the robustness of the testing, creating a false sense of security for compliance teams and leaving risks unmonitored.
The FCA’s Market Watch 79 highlighted instances where systems failed due to poor implementation, including lack of rigorous back-testing and failure to challenge data integrity, leading to incorrect alerts and inadequate adaptability of alert types for various instruments.
The FCA emphasizes that implementing a surveillance program should be an ongoing process, regularly reviewed and updated. Firms should consider market abuse in areas such as risk governance, data governance, and continuous surveillance model attention. This includes periodic review of market abuse risk matrices, vigilance on data completeness and accuracy, and regular testing of surveillance model parameters.
ACA’s integrated surveillance solutions assist firms in monitoring conduct and trade risks to meet global regulatory standards and industry best practices. Their Market Abuse Surveillance solution helps detect and investigate potential cases of insider trading, market manipulation, and preferential allocations, tailored to meet the unique needs of each business.
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