Financial Crime Risk Management Systems: Trade Surveillance – Transaction Monitoring 2019

Chartis defines trade surveillance as investigating an organization’s activities for indications of market abuse. This overarching term covers two discrete activities:

  • Transaction monitoring: examining how individuals and institutions conduct trades.
  • Communications surveillance: observing and analyzing how individuals communicate about trades.

These activities are highly distinct, with distinct technology systems and functionality, and different vendors serving each market.

In this report, our first dedicated to trade surveillance, we will focus on transaction monitoring solutions, considering the drivers of demand among financial institutions (FIs), the underlying technologies, and how solution vendors are meeting FIs’ requirements. The next report in the trade surveillance series will examine the demand drivers and vendor landscape for communications surveillance solutions, with a full treatment of communications surveillance to follow in 2020.

Drivers of demand: institution type, regulation and context

FIs have been sharpening their focus on transaction monitoring in recent years, but the challenge of detecting actual abuse remains significant. Chartis believes that many surveillance algorithms are only partially effective, and false positives are a persistent problem. To prove market abuse, FIs need more capabilities than just the predictive analytics championed by several vendors, including second-order processes and even physical investigation. As the surveillance marketplace grows, infrastructure, processing capability and ease of use, rather than outcomes, will increasingly differentiate effective solutions. The success of a transaction monitoring solution – such as its ability to perform trade reconstruction or best execution at scale for a given asset class – is increasingly a function of technology.

This comes, we believe, against a growing realization among FIs and vendors that infrastructure trade-offs are a vital consideration in transaction monitoring. There is no all-purpose database or technical infrastructure that can cover all of an FI’s requirements. FIs will prioritize their requirements (for processing, for example – between real-time or ‘end of day’) according to the type of institution they are and the specific regulations they must abide by. This forces them to make significant choices between system components such as speed and breadth of coverage.

Vendor landscape: complex and varied

Reflecting the diversity of FIs’ requirements, the market for transaction monitoring solutions is complex, with a mixture of leading providers and smaller players supplying a variety of products. These solutions require a variety of technical and functional capabilities, across analytics and databases. In some trading areas (such as retail broker-dealing and equity trading), requirements have changed little over time, so vendors in these areas have remained dominant. In other trading areas – such as OTC derivatives and wholesale broker- dealing – where analysts need to monitor transactions in real time, FIs increasingly require streaming databases and an ability to replay and reconstruct trades and order books at a fine-grained level.

To evaluate the vendor landscape and explain the structure of the market we use Chartis’ RiskTech Quadrant®. The RiskTech Quadrant® uses a comprehensive methodology of in-depth independent research and a clear scoring system to explain which technology solutions meet an organization’s needs. The RiskTech Quadrant® does not simply describe one technology solution as the best risk management solution; it has a sophisticated ranking methodology to explain which solutions would be best for buyers, depending on their implementation strategies.

This report covers the following providers of transaction monitoring solutions: Aquis Technologies, BAE Systems, Bloomberg, b-next, FIS, Intellect Design, Irisium, Kx, Nasdaq SMARTS, NICE Actimize, OneMarketData, Oracle, Refinitiv, Scila, Software AG and The Technancial Company (TTC).

We aim to provide as comprehensive a view of the vendor landscape as possible within the context of our research. Note, however, that not all vendors we approached responded to our requests for briefings, and some declined to participate in this research.