Market Surveillance

Market surveillance is the prevention and investigation of abusive, manipulative or illegal trading practices in the securities markets. Market surveillance helps to ensure orderly markets, where buyers and sellers are willing to participate because they feel confident in the fairness and accuracy of transactions. Without market surveillance, a market could become disorderly, which would discourage investment and inhibit economic growth. Market surveillance can be provided by the private sector and the public sector.

Many participants in the private sector engage in market surveillance. For example, NASDAQ OMX offers a market surveillance product called SMARTS that assists individual exchanges as well as regulatory agencies and brokers in monitoring trading activities across multiple markets and asset classes. Within its own exchange, the CME Group runs a market surveillance team to detect, monitor and review trader positions and transactions. Third-party providers of software platforms and analytics such as IBM (Surveillance Insight for Financial Services) and Thomson Reuters (Accelus Market Surveillance) assist in the customization and set-up of comprehensive surveillance capabilities for other major exchanges such as NYSE Euronext.

For another layer of oversight, at the government level, entities such as the Securities and Exchange Commission's (SEC) Division of Enforcement provide broad market surveillance to help uphold securities laws and protect investors against fraud. More focused government organizations, such as the Commodity Futures Trading Commission (CFTC), provide market surveillance for specific segments of the market (for example, the futures market). Private, self-regulatory organizations such as the National Futures Association (NFA) also conduct market surveillance.

It is obvious that despite sophisticated market surveillance systems illegal activity occurs — not just once in a while, but regularly. Even simple insider trading schemes are perpetrated. In most cases, the long arm of the law immediately or eventually catches up with those committing fraud, but the question remains how illegal trades were able to transpire in the first place. Rogue traders like Societe Generale's Jerome Kerviel or JP Morgan's "London Whale" somehow manage to lose billions at their trading desks before their schemes are stopped. Other traders in charge of setting LIBOR got away with manipulating the rate for personal gains before they were exposed. Market surveillance will never be 100% fail-safe as long as there are determined individuals who can find holes in the system. Also, as techniques to circumvent trading regulations grow more sophisticated, both internal and external system programmers and implementers must learn to keep up with every one of the moves.