Helping Firms Transition to Proactive Surveillance 

Group of traders and compliance team looking over trading data performing trade 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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