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Uncovering Insider Trading: How Our ParticipantView Feature Enhances Your Investigation

Insider trading, the covert practice that involves trading securities based on non-public, material information, presents a significant challenge to maintaining fair and transparent financial markets. This illicit activity is often obscured within the vast sea of normal trading activities, making it difficult to detect and prevent. KRM22’s innovative Market Surveillance product contains ParticipantView, which offers a multi-faceted approach to address the challenges associated with identifying insider trading. In this blog post, we will explore the challenges faced in detecting insider trading and how ParticipantView provides solutions to each of these challenges.

Challenge 1: Hidden Historical Activity

One of the primary challenges in detecting insider trading is the ability of wrongdoers to hide their activities amidst legitimate trading. Insider traders often take great care to blend in by executing their trades in a manner that doesn’t raise suspicion. ParticipantView addresses this challenge by offering Historical Activity for a particular security. This feature allows users to scrutinize all orders and trades associated with a suspected trader, broker, or client for a specific security. By examining a trader’s history with a security, analysts can determine whether their current activities deviate from their norm. Sudden and unusual activity in a security they rarely trade can raise red flags, helping to uncover potential insider trading schemes.

Challenge 2: Evading Detection Patterns

Insider traders are not only adept at disguising their historical activity but also at evading detection patterns. They often alter their behavior when they sense scrutiny. This presents a challenge for surveillance systems, as sudden changes in behavior can be harder to spot. To counter this challenge, ParticipantView contains Alerts and Behavior Analysis. In addition to historical data, it displays alerts raised by the suspected trader over a specified timeframe. This feature enables analysts to identify any sudden cessation of alerts coinciding with potentially suspicious trading activities. Such a pattern may indicate an attempt to avoid detection and further warrants investigation.

Challenge 3: Concealed Buy/Sell Activity

Another challenge in detecting insider trading is identifying abrupt shifts in a trader’s position, especially when they attempt to hide their true intentions. For instance, a trader who traditionally buys a security may suddenly start selling in large volumes. This could be indicative of insider information being used to profit from a forthcoming decline in the security’s value. ParticipantView addresses this challenge through its “Buy/Sell Activity Breakdown” feature. This capability allows for a detailed analysis of a trader’s historical activity by categorizing transactions into buys and sells. By monitoring changes in this breakdown, analysts can spot sudden and suspicious shifts, thereby helping uncover potential insider trading activities.

Conclusion

Detecting insider trading is a formidable challenge, given the clandestine nature of this illegal practice. However, innovative tools like KRM22’s ParticipantView provide a robust solution to these challenges. By offering historical activity analysis, behavior pattern detection, and buy/sell activity breakdown, ParticipantView equips financial institutions and regulators with powerful tools to identify and mitigate insider trading risks. In doing so, it contributes to the maintenance of fair and transparent financial markets, where all participants can trade with confidence, knowing that surveillance systems are actively working to protect the integrity of the market. As the financial landscape continues to evolve, tools like ParticipantView will play a crucial role in ensuring the trust and credibility of global financial systems.

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Rocking for a Cause: August Son Takes the Stage at the 12th Annual Rocktoberfest

Every so often, our professional lives can combine with our passions outside of work. My band, August Son, playing for the 12th Annual ALTSO Rocktoberfest in Chicago is one of those moments and a highlight for me. It’s shaping up to be an unforgettable night of music, camaraderie, and making a real difference in the lives of children in need.

Picture this: the stunning City Winery in Chicago, bathed in the warm glow of autumn, hosting an event that brings together the financial industry’s best and brightest, all in the name of a tremendous cause. This is what Rocktoberfest is all about, and August Son is thrilled to be a part of it.

For those who might not know, ALTSO (A Leg To Stand On) is an organization that changes lives by providing prosthetic limbs to children in need. By donating to ALTSO, August Son is directly supporting this mission and helping kids lead better lives. To date, they’ve already provided prosthetic limbs to 22,000 children, and that number continues to grow, thanks to events like Rocktoberfest.

Now, let’s talk music. Rocktoberfest is a showcase of talent from the financial industry, and August Son is proud to be one of the six excellent bands taking the stage. As a musician, nothing beats the thrill of playing live, and when that music benefits those who need a special type of help, it’s truly something special.

Our band, August Son, has a unique mix of members, including two doctors. For them, this event is a highlight of the year, a chance to combine their love for music with their passion for helping others. Some members have said it surpasses sharing the stage with Eric Burdon and WAR! We’ve been playing since 1989, and over the years, we’ve developed a deep appreciation for using our talents to support charity events in and around Chicago.

Helen Keller once said, “The simplest way to be happy is to do good,” and I couldn’t agree more. Rocktoberfest embodies this sentiment, bringing happiness to all involved while making a profound impact on the lives of those less fortunate. I tip my hat to Gabriella Mueller Evrard, Hannah Schumacher, and Beth Ann Hemming from ALTSO for their tireless dedication and effort in organizing this event.

A heartfelt shoutout is also in order for the Martino Family and my company, KRM22, for their generous sponsorships. It’s the support of sponsors like these that make events like Rocktoberfest possible and enable August Son to continue making a difference through our music.

In the spirit of Rocktoberfest, let’s not forget the joy of coming together with friends, coworkers, and industry colleagues. It’s not just about the music; it’s about the shared experience of making a positive impact on the world. So, come on down to City Winery on that magical evening and join us in supporting this incredible cause.

August Son loves to play live, and our passion for music and charity events runs deep. Keep an eye out for our upcoming shows at venues across the Chicago area. We’re always thrilled to share our music with you, and who knows, your attendance might just change a child’s life for the better.

Here’s how to support August Son:

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A Leg To Stand On (ALTSO) is a nonprofit providing free, high-quality prosthetic limbs, orthotic devices, and appropriately fitted wheelchairs to children in the developing world.

Two decades of ALTSO’s Rocktoberfest series have harnessed the power and generosity of the financial services industry to help 22,600+ CoolKids across 20 countries — empowering the next generation.

ALTSO’s 12th Annual Rocktoberfest-Chicago will take place on October 5th at City Winery in Chicago. Rock For Good because mobility is more than movement, it’s a human right. Mobility provides access to education, future employment, and the tools to live self-sufficiently.

A Leg To Stand On, Inc. is a US Based 501(C)3 EIN 02-0594709 & UK Based Charity 1118048

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Unraveling the Complexity of Credit Risk in Capital Markets Firms

Credit risk is a critical factor for capital markets firms as it directly affects their ability to manage potential financial losses stemming from defaults or failure to meet obligations. However, complexity within these organizations often hampers the assessment and communication of credit risk. In this blog post, we will explore the significance of understanding credit risk, examine two key drivers influencing it, and highlight how the Risk Cockpit can help firms achieve cohesive risk management.

Understanding the Drivers of Credit Risk

Capital markets firms often face challenges in comprehending the two distinct drivers influencing credit risk and how they interact with each other. This lack of clarity makes it difficult for firms to accurately assess and communicate their credit risk levels while aligning them with their risk appetite. These two drivers are:

1.    Variation in Credit Risk Profiles

The credit risk profiles of different desks within an organization significantly impact the overall risk faced by the firm. Inadequate visibility of this relationship impedes effective control as firms are not able to identify the source of their credit risk and so do not make conscious decisions to operate at a given level of risk. By unknowingly operating outside of their risk appetite, firms can suffer from unexpected losses.

2.    Control Failures

Three examples of potential control failures that we see firms actively managing are:

a)      Inability to calculate margin requirements due to system issues:

Flaws or limitations in the systems used can compromise the firm’s ability to assess and manage credit risk effectively. Alternatively cyber-attacks can result in systems not being available leaving firms flying blind if adequate controls are not in place.

b)      Trading limits misalignment with client capital:

Inconsistent or inadequate alignment between trading limits and client capital can lead to situations where positions are not adequately covered, increasing the potential for financial losses. In the most extreme situations, this can even lead to harm to the market

c)      Ineffective management of intraday margin changes:

Changes in intraday margin requirements by counterparties can result in exposures that are not promptly communicated or passed on to clients. Failure to manage these changes effectively not only contributes to credit risk but also increases liquidity risk within organizations, as highlighted by the Financial Conduct Authority (FCA).

Understanding Credit Risk through the Risk Cockpit

To address the complexities associated with credit risk assessment, capital markets firms can leverage the Risk Cockpit. The Risk Cockpit allows organizations to track credit risk both at the corporate level and individual desks. By leveraging heatmap functionality, risk management teams can identify and understand the key drivers of credit risk. This enables them to communicate the current credit risk level and associated drivers to the board with confidence, facilitating informed decision-making.

Mitigating Credit Risk | A Case in Point

Consider a firm that identifies high credit risk due to ineffective trading limit controls. Recognizing the potential harm this risk poses to the market, the firm decides to invest in enhancing its trading limit controls. This strategic decision reduces the potential harm associated with this specific credit risk. The firm needs to track the implementation of this control, understanding the cost, quality and time associated with implementation to ensure that it is effective. Once implemented the firm needs to track the effectiveness of this control to ensure that they continue to operate at their desired level of credit risk. The Risk Cockpit supports this workflow from the identification of an issue through to the mitigation.

The Power of Cohesive Risk Management

Credit risk is a critical factor that capital markets firms must diligently address. Recognizing and comprehending the complexity inherent in these organizations is essential for accurately assessing and managing credit risk. By leveraging the Risk Cockpit and adopting a cohesive risk management approach, firms can effectively monitor and communicate their credit risk levels, align risk appetite, and make informed decisions to mitigate potential harm. Ultimately, understanding credit risk empowers capital markets firms to navigate the intricate landscape of the financial industry with confidence.

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Contact us to find out more about how we can help you manage your credit risk

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Value at Risk showing historical analysis and figures
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Migrating to Historical VaR

In the context of margining methodologies, a discussion has been ongoing regarding the comparison between SPAN and VaR approaches, revolving around the accuracy and effectiveness of these methodologies in capturing risk. Advocates of SPAN argue that it offers a more comprehensive assessment by considering various factors specific to individual contracts and portfolio interactions and believe that this approach provides a more accurate reflection of risk exposure. Meanwhile, proponents of VaR argue that it provides a simplified and transparent measure of risk, making it easier to understand and implement. VaR is widely used in financial institutions and offers a standardized framework for risk assessment.

The CME and ICE have taken a leadership position on this and are transitioning over to VaR at various points over the next 12 months. KRM22’s post trade functionality has always reflected the array based margins of these exchanges, a feature key to our customers. In response to the decisions made by the CME and ICE, KRM22 is updating our Trading Risk suite to more closely represent their account’s risk exposure. This will allow for the risk management communities to view their parameterized stress risk, margin requirement, and VaR calculations in the same view providing a wholistic risk profile associated to their accounts.

VaR calculations will include customizable confidence levels, expected shortfall, histogram, and product sector breakdown of each portfolio.

We are already working with the exchanges and customers to develop and test the new functionality. Traditional array based margining will continue to be supported as long as the exchanges make it available.

Contact us to discover more about migrating to historical VaR.

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Group of traders and compliance team looking over trading data performing trade Surveillance
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Helping Firms Transition to Proactive Surveillance 

At KRM22 we are committed to providing our customers with the services they need to manage their risks as they require. This commitment has resulted our Market Surveillance team spotting a new Fixed Income related trend in the operational risks managed by compliance teams.

For some time, Fixed Income houses have leveraged dealer streaming and composites. Streaming is when a dealer or electronic market maker constantly sends prices and volumes at which it is willing to both buy and sell the given bonds to their clients. They would typically do this for every major on-the-run issue, and provide different pricing for different sizes. Buy side clients can then see the prices for their requirements without needing to submit a Request for Quote (RfQ). Through this, information leakage from the buy side’s perspective is eliminated pre-trade. A composite can be seen as an aggregate pricing data that uses statistical averaging techniques to eliminate outlier quotes from the population of bids and offers. The resulting composite prices, spreads and yields are recognized by market participants as accurate and representative of the range in which trades are likely to be filled.

Operationally, both these structures are well within the risk profile of the industry. However, through our ongoing conversations with Fixed Income customers, we have identified that certain market participants often stream highly competitive prices and then provide a worse quote following an RFQ, meaning the streamed price acts as bait to attract the client. At the same time, they have seen that it is also possible for prices to be quoted that are significantly away from the average price.

Although not currently on the radar of regulators, compliance teams are seeing deployment of these strategies and indicators of undesired behavior in their traders. With the trend to prevention rather than retrospective action, our customers wish to operate in a more proactive surveillance model. They are looking for patterns to isolate dealers and take a look at their other activity to identify issues such as Wash Trading and Front Running.

This is why we have released two new features this month, which you can read about here.

If you’d like to know more about how KRM22 can help you move to a proactive surveillance model, contact us for a discussion or demonstration.

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KRM22 at FIA Expo Chicago

FIA EXPO returned to Chicago in 2022 with a new look at The Sheraton Grand Riverwalk Hotel. As always, the event was an excellent way to reconnect with customers, friends, and colleagues across the industry just prior to the Holiday Season.

As is befitting of this event, KRM22 attended with a contingent from our US and UK offices. It was great to be able to get real-time feedback on some of our new plans, and we had many stimulating discussions throughout the event

Spurred on by the announcement that the KRM22 Risk Manager was available to TT customers, many of the conversations were about how KRM22 is realizing its vision of the Global Risk Platform being the single stop shop for trading and corporate risk. It was fantastic to have discussions around how to use all of the risk data held within the KRM22 services our customers leverage. Over the week, we encountered a range of user cases, from Tier one banks wanting to monitor their client’s activity, to individual proprietary traders wanting to ensure they understood their available margin.

Looking at the example of the KRM22 Risk Manager, not only will TT customers will receive Exchange Margin Calculations for SPAN and non-SPAN Margin for the first time, but it complements the KRM22 Limits Manager which was launched at FIA BOCA in March this year.

Traders and risk managers using TT’s services can now not only manage and approve pre-trade limits across a variety of ISVs and Exchanges, but also deliver exchange margin and stress calculations through the click of a button. Users can view start-of-day (SOD) and intraday margin calculations and stress results that update with each position change. SOD and intraday margin calculations include Initial Margin, Maintenance Margin, Net Option Value (NOV), Credit Allowance/Margin Ratio and Margin Risk Score. KRM22 Risk Manager will also provide a “Worst Case” 3 Sdev stress analysis on SOD and Intraday positions by account with detail to the product level

All of this functionality is also available to non-TT customers directly through KRM22. To find out more read our announcement of the launch of KRM22 Risk Manager on TT or contact us directly.

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Meet the Team | Jameson Jordan

Tell us a little bit about your background, where are you from and how did you get here?

I grew up in the southwest suburbs of Chicago.  I attend college at North Central and during my senior year started working at Prime Analytics in 2008 which was acquired by KRM22 in 2018.  I have worked in FinTech my entire professional career.

What do you do at KRM22?

I work in an Account Management/Support role for our market risk clients.  Recently I have been working on the implementation and onboarding of new customers for their market risk product needs as well as helping out by demonstrating new features and how they can better use the products.

What is it that attracted you to KRM22?

I saw KRM22 as a global company which provides me with opportunities I would not be afforded at a smaller company.  With KRM22 there are opportunities for growth professionally for me as well as the company and this is something I relish.

This has been a fast-changing year for KRM22, how have you found it?

I’ve really enjoyed this year. I’ve found the synergy between the offices worldwide has been apparent and we are really pulling together as a single team.  I spent some time recently visiting the London office, which was great to meeting my coworkers face to face, especially as we couldn’t during the pandemic.

What do you do outside of work to keep a life balance?

I enjoy fishing and golfing (although poorly, something to work on this year) as well as watching any sporting event that is on. I’m also a huge Star Wars fan.

Finally, what are you most looking forward to over the next year?

Helping our customers grow by expanding the functionality of our existing products as well as working on our new product offerings.

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Trader worried about volatility risk management
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Risk Management During Extreme Political Volatility

2022 has seen a period of increased volatility worldwide. Investors are focused on central banks raising rates, with markets already factoring in a 75-basis point hike by the U.S. Federal Reserve. The latest Consumer Price Index report showed inflation rising faster than expected, and while conversely the equity markets are staging a small rally, many major US names that are often seen as safe havens, including the likes of Netflix, Tesla, Apple and Meta, are down 30%-60% from 52-week highs.

Within this global backdrop, the UK has suffered extreme volatility in the wake of the resignation of Prime Minister Boris Johnson in July.

It started with an idea formed from basic assumptions by the new leader of the UK Government, Liz Truss, and her new chancellor, Kwasi Kwarteng; Cutting tax would lead to increased consumer spending, boosting growth and counter slowing activity and rising inflation. Plus, lower taxes tend to increase the government’s tax receipts longer-term, rather than reduce them.

The market reaction was immediate and negative, with concerns weighing on UK assets and the British Pound losing value overnight, adding to the cost of importing any goods of services, introducing the risk of an inflation spiral. Add in the deepening energy crisis, most of which is priced in USD and the UK is facing a double whammy which could tip the nation into a recession this winter.

This created massive upheaval in the UK markets. Whilst the British Pound stabilized against the U.S. dollar, there was a large selloff in long-dated UK government bonds (Gilts) as investors scrambled for cover trying to free up cash. The tax cuts would need to be paid for which would likely mean a more aggressive approach to interest rate rises.

The Bank of England (BoE) stepped in, immediately purchasing gilts to ensure stability in the value of both the British Pound and UK government treasuries. The Chancellor was forced to revise or cancel many elements of the spending package, scrapping plans for tax cuts for Britain’s highest earning citizens. However, UK markets remained in turmoil. The BoE have stopped propping up the gilt market in order to concentrate on controlling the double-digit inflation that the country now faces.

Ultimately the UK Government leaders stood down after just 44 days in power. Wind forward just 5 days and a new leader, Rishi Sunak and his cabinet, are in power, reversing almost all of the previous teams’ decisions with immediate effect.

Overall, the situation remains complex and fast-moving. Global markets are likely to remain volatile and turbulent, emphasizing the need for discipline from the investors and control by the Banks and Brokers that service them. KRM22’s customers have been able to use our products to manage their risk effectively. The Market Surveillance product has supported firms concerned about market abuse during the gilt run and the Market Risk suite has helped those concerned about the effect of increased volatility on the derivatives and equities markets. Meanwhile, other customers have been able to use the Risk Cockpit to track clearing and settlement without interruption during this time.

We do not know what tomorrow brings, but with the right partners, services and infrastructure we can make sure that we are ready for it, and be ready for whatever the day after that brings as well.

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SOC2 compliance risk management
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How to Track SOC2 Compliance

In Q3 2022, KRM22 completed its annual SOC2 Type 2 assessment for the year and passed with no issues reported by its auditor. SOC2 is a compliance standard for service organizations that specifies how they should manage and secure customer data. As businesses turn to software vendors that deploy IT solutions in the cloud, it has become critical that these cloud-based solutions adhere to the highest standards for security, availability and confidentiality and that this can be demonstrated.

Why does this matter?

Internally, this gives us confidence that our processes, policies and procedures are fit for purpose. We want to be sure that what we say we do and what we actually do are one and the same. Good controls and policies also mean that everyone at KRM22 is better placed to understand our individual and collective responsibilities – and, perhaps most importantly, why they matter.

Externally, audits such as SOC2 also provide confidence to our customers. KRM22 can be trusted to act responsibly and professionally on their behalf with their data in mission critical systems. Our customers can show their own IT, InfoSec and Compliance teams that KRM22 meets their requirements for data security.

How do we track compliance?

We have deployed an instance of our Risk Cockpit product to ensure all its processes are completed accurately and promptly. SOC2 is listed as a Process that KRM22 must complete and each control our auditor assesses us on is stored in the Cockpit as an Information Asset.

All tasks that are regular (these can be monthly, quarterly or annually) are tracked as automated items, assigned to the correct team, assigned due dates, linked to evidence that shows the task has been completed, and then finally tracked back to the underlying Control.

By using our Kanban-boards, the Information Security team can see immediately what tasks are open, in progress, or completed. When a task is set to recur, it is automatically recreated at the defined interval and it’s progress shown on the board.

Any authorized KRM22 staff can see who is Accountable or Responsible for a given task, and who in the firm they should Inform or Consult too.

We use these tools to conduct a mid-year audit on itself to verify that no tasks are falling behind or not completed. We then review the quality and availability of evidence to support a task, immediately seeing if we are fulfilling the requirement, and how easy it is for KRM22 to provide evidence to match

Finally, should a member of staff leave KRM22, all tasks previously owned by that staff member can be handed over to a replacement in an automated fashion. Nothing gets dropped or missed even in the event of staff changes.

The Risk Cockpit has become a tool which not only supports the SOC2 process, but is central to it.

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Meet the Team | Maria Teneva

Tell us a little bit about your background, where are you from and how did you get here?

I am from Bulgaria, and I came to England in 2017. I studied Biomechanical engineering at King’s College, London, graduating in this year. I joined KRM22 in April 2022 straight after graduating, so am pretty new here still!

What do you do at KRM22?

I play a key role in supporting our clients as an analyst in our customer services team. I am one of the first people customers meet when they have an issue, and I work as a bridge between them and the product teams to make sure everything is working as it should. What I mostly enjoy about the work is that every day is different and there is always something new and exciting to do.

What is it that attracted you to KRM22?

It was obvious how invested the company is in their customers’ wellbeing, where each member of the team resolves issues with care and professionalism. What KRM22 offer as a service was unique to me and I saw this as an opportunity to contribute to an exciting, forward thinking, and fast-paced company.

You joined KRM22 during a fast-changing year, how have you settled in?

I was nervous at first because a new job means new procedures, new office culture and a lot new to learn. Thankfully I have settled in quite well, thanks to the welcoming atmosphere and amazing team. What I highly appreciate and am grateful for is that although I learning the business, I am actively encouraged to contribute to my team. Everyone is so friendly and helpful, I feel accepted and part of the family already.

What do you do outside of work to keep a life balance?

I like mentally challenging activities such as assembling ELEGOO robots. I also enjoy listening to music and podcasts as well as being an avid reader. KRM22 is a very active company and I have recently joined the gym to keep myself fit and improve my mental health.

Finally, what are you most looking forward to over the next year?

I am looking forward to meeting new people, making memories with my family and living new experiences.

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