Stock Exchange Surveillance and Investor Protection Role, goals, targets, challenges and more

Transcription

1 Stock Exchange Surveillance and Investor Protection Role, goals, targets, challenges and more Regional Conference on Investor Protection in Capital Markets; Mumbai, India; October Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

2 Trading Surveillance Office (TSO) I. Trading Surveillance of Frankfurt Stock Exchange (FSX) and Eurex Deutschland (Eurex) Supervisory structure Exchange structure Trading Surveillance Office II. Investor protection role, goals, targets, challenges and more 2 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

3 Supervisory structure in Germany Federal Financial Supervisory Authority Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) Exchange Supervisory Authority Börsenaufsichtsbehörde (BAB) (located in each federal state, e.g. Hessen) trading activities & market participants Trading Surveillance Offices of the Stock Exchanges (henceforth referred to as TSO) (located at each exchange in Germany) 3 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

4 Main tasks of the regulators Federal Financial Supervisory Authority (BaFin) [acc. to Securities Trading Act (Wertpapierhandelsgesetz) and German Banking Act (Kreditwesengesetz)] Market abuse - prohibition of insider dealing - prohibition of market manipulation Supervision of disclosure requirements Supervision of code of conduct in the exchanges International co-operation Supervision of credit institutions and financial services providers Exchange Supervisory Authority (BAB) [acc. to Exchange Act (Börsengesetz)] Supervision of legal provisions and proper conduct of the exchange Granting permission to operate exchanges and approval of their rules and regulations Supervision of exchanges, operating companies, entities relating to exchange business 4 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

5 Exchange structure: civil law meets administrative law (mutatis mutandis: Eurex Deutschland, Tradegate Exchange) Frankfurt Stock Exchange civil law admin. law 5 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

6 Trading Surveillance Office Legal requirements Area of competencies Tasks Investigation and workflow Used techniques 6 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

7 Legal requirements Trading Surveillance Office Organ, subject to administrative law; entrusted and granted by law with competencies similar to those of the Exchange Supervisory Authority Each exchange must operate a TSO in compliance with the requirement of the Exchange Supervisory Authority Head of TSO must report on a regular basis to the Exchange Supervisory Authority The Exchange Supervisory Authority may issue instructions to the TSO and may assume their investigations Employees can only be released from their duties subject to agreement by the Exchange Supervisory Authority Head of TSO acts according to his legal status subject to governmental liability 7 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

8 Area of competencies of the Trading Surveillance Office to obtain and review documents, s, telephone-records to question market participants, private individuals, central depositories, operating companies Competencies to visit respondents and to do on-site audits to request the disclosure of client data, positions to impose fines for non-cooperation to co-operate with other supervisory authorities and to exchange data to initiate independent investigations 8 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

9 Tasks of the TSO I Systematic and comprehensive data recording and analysis of exchange data and the ensuing settlement Supervision of trading on the exchanges located in Frankfurt and their settlement (incl. open market of Deutsche Börse AG, MTF) Monitoring of alleged violations of trading rules Supervision of other irregularities that could adversely affect the proper conduct of business on the exchanges and their settlement 9 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

10 Tasks of the TSO II Reporting of findings of our investigations to the BaFin Investigation based on complaints (Investor-Hotline, e.g. private investors, whistleblowers) Administrative assistance for other (supervisory) authorities (e.g. Federal/State Office of Criminal Investigation, BaFin, Secret Services, Public Prosecutor) Co-operation with supervisory authorities and other bodies responsible for the supervision of exchanges in Germany and abroad (data exchange, co-operation) 10 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

11 Tasks of the TSO III Co-operation with other exchange bodies (e.g. with Management Boards as far as the development of new products, market models and exchange rules are concerned) Documentation (EDP-assisted archiving system in line with audit requirements) Enhancement of monitoring systems and -processes 11 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

12 Investigation and workflow Regulatory Authorities data analysis pending cases redefinition trigger feedback investigation reporting documentation of activities taken Public Prosecutor Management Board enforcement sanctioning fine f e e d b a c k trade data alerts order data complaints market information inquiries data analysis on-site audits 12 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

13 Important functions of the investigation tools real-time-monitoring of executed orders (transactions) and entered orders batch monitoring of trading activities market replay 13 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

14 II. Stock Exchange Surveillance /Investor protection role, goals, targets, challenges and more Stock Exchange Surveillance : Role? Easy to answer! it s an regulated market! 14 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

15 II. Stock Exchange Surveillance /Investor protection role, goals, targets, challenges and more Stock Exchange Surveillance Goals? Market Integrity Of course Ensure: Rule compliance, avoid market abuse and detect irregularities Not less than: Surveillance of price- finding process and ensure fundamental role of a regulated market as capital valuation center 15 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

16 II. Stock Exchange Surveillance /Investor protection role, goals, targets, challenges and more from retail to wholesale Investor Hotline TSO is running a free of charge telephone hotline; Private investors, whistleblowers and those, who always complain have the chance to address questions, complains and order related inqueries. 30 to 60 calls per trading day ( rel. to respective market situation), time consuming, however, overall some charming invetigations occur related to 16 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

17 Challenges the markets always in motion algo trading The economics of surveillance is upside down! - marginal costs of generating orders are decreasing: automation of trading means scaling out the human - at odds with increasing marginal costs of surveillance: paradox of information; surveillance on aggregated data, missing capability to scale investigations, erosion of regulatory set-up and responsibility of [machines rather than] traders ~ what conclusions can be drawn from data? Frequency, or High-Frequency seems to be an issue! - of course it affects the economics of surveillance (higher frequency = more data, given inadequate source data, but is there a material difference if same business models use a piece of technology? - to be avoided positive feedback loops (cascading effects) of automated systems regardless whether low or high frequency; safeguards must be in place such as volatility interruption (= change of matching algorithm due to price movements) and clearing stop-button functionality - because of latency competition less appetite to provide regulatory information within order/quote flow (participants & trading venue operators) 17 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

18 Challenges the markets always in motion algo trading Fragmentation creates more abusive behavior! - as a matter of fact interdependencies of products and markets can be exploited in an abusive way - however, the types of abusive patterns still seem to be the same. More interdependencies will affect the economics of surveillance as investigation and detection efforts increase. (lesson learned: full transparency and one single world wide order book?) - competition driven fragmentation is at least transparent, as such surveillance knows how to conduct the investigative process. - centralize responsibility and or respective data has it s limit if perpetuators deliberately try to hind activity within fragmented markets ~ what will the next move of those? 18 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

19 Interplay: Surveillance basics CORE PRINCIPLE: Secure, enhance and enable surveillance to describe a cause and effect relationship Abstract spoken: surveillance depends on triggers that are exceptions significantly caused by an entity/individual or group of entities/individuals What, who, when, why and how most granular information as possible 19 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

20 The ideal world from a frontline surveillance perspective Elaborate same procedures and standards (functional, technical, same methodologies not tools) for exchanging and addressing cross-market/cross-border surveillance enhance semi automatic requests and responses. The initial step: machine readable surveillance! (combat the odd economics of surveillance) Make the identification of the order originator obligatory within the order flow Make each individual algorithm/strategy identifiable within the order flow. (no definition at all in advance; e.g. just algo/strategy e.g. 1, 2, 3 as implemented/known by firms) Enhance data & retention requirements for those applying HFT/Algo. Make keeping input and output data compulsory (with reference to marked strategy) Impose an obligation to have systems in place to replay the algorithm/strategy (given a time period and Algo/HFT identifier) (Re-)enable trading venues to take actions with respect to a specific order flow. Actions can be block, limit etc. 20 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

21 challenges. German HFT Bill stipulates measures and procedures to regulate algorithmic trading and HFT by introducing. Aspects of HFT Bill 1 Additional competencies for the Exchange Supervisory Authority/BaFin/ Trading Surveillanve Offices (TSO) 2 Price discovery protection (e.g. volatility interruptions) 3 Requirements to set appropriate tick sizes 4 Organizational requirements for investment firms (IFs) 5 Order to Trade Ratios (OTR); Excessive System Usage-Fees (ESU- Fee) 6 Flagging of algorithmically generated orders 7 Registration obligation as Financial Service Institutions, HFT license 21 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October

22 Backup: Common surveillance challenges? Increased difficulties to create ex-post transparency (due to number of transactions, quotes and orders, electronic trading decision) No direct contact person, as companies avoid having/giving a single person complete knowledge of applied strategies/systems (threat: copy & walk away). Whom to question? Companies tend to refuse explanation and information of applied strategies referring to it as confidential business information Lack of historical pattern - no finger print as unlimited strategies can be conducted by one trader (id) and trading decisions are not easily reproducible (as logic and input variables may not be available) compression and aggregation problem (see examples) New perpetuators of abusive behavior (counterpart is a machine now) and new systemic risk based on technical failures and software bugs (distortion, spiral and herding effects) Having machines trading it is difficult to proof intention of potential violations (legal requirements) 22 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

23 Backup II. Centralize? Without centralization we do not have the big picture! Centralizing data may enhance investigative and detection capabilities, but some problems exist - data content: where is the limit (trade, quote, order, on-exchange, OTC, phone messages, clearing data, social network activity, video monitoring, bank account movements) - technical restrictions, least denominator solution as multiple trading engines and all other sources need to be taken into account, different jurisdictions, who is who (national/unique IDs kept supranational), timestamps, related instruments. - Where is the benefit of keeping data centralized (physically) in one big database? Even in one big database there is no center. The only advantage is you know where and how to ask the question (which can be achieved without having one ') - Unless having one jurisdiction centralizing is not an appropriate answer to enhance surveillance Playing with (centralized) data! Can we detect something without asking the right question? 23 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

24 Backup: Compression and aggregation problem I Behaviour such as e.g. order/trade ratio, orderbook concentration etc. 24 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

25 Backup: Compression and aggregation problem II 25 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

26 Backup: Compression and aggregation problem III 26 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

27 Backup: Compression and aggregation problem IV 27 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

28 Backup: Compression and aggregation problem V 28 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

29 Backup: Compression and aggregation problem VI As soon as you compress/aggregate, you loose detailed information. It seems gambling, but to know whether you are gambling you need to know for a blink all what is behind 29 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013

30 Backup: Compression and aggregation problem VII As soon as you compress/aggregate, you loose detailed information. It seems gambling, but to know whether you are gambling you need to know for a blink all what is behind 30 Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Deutschland, Mumbai, October 2013