The UK Financial Conduct Authority (FCA) today posted its latest Market Watch, sharing its concerns about gaps in users’ surveillance of web-based platform activity.
In particular, the regulator is concerned that requirements for market abuse surveillance are still not being fully met, ffive years after the introduction of the Market Abuse Regulation (MAR) in 2016.
The FCA has observed wholesale brokers/operators introducing types of electronic trading platforms to increase access to liquidity and efficacy in trade execution. There is a growing use of periodic, continuous, and dark liquidity, via web-based user interface (UI) portals, matching sessions and ‘pop-ups’. For some Rates and Fixed Income products, these platforms now supplement traditional services in a hybrid broking model, working alongside central limit order book (CLOB) style platforms, within an Organised Trading Facility (OTF) or Multilateral Trading Facility (MTF).
Many electronic execution platforms (whether part of the systems of a regulated market, MTF, OTF or Systematic Internaliser) require formal connection and interface with a user’s trading systems. This means that order and trade messages are systematically recorded. However, some platforms’ connectivity is made via web-based UIs where direct connection to users’ trading systems is not required and users have been unable to establish one.
Trade details for trades executed on web-based platforms are generally recorded in users’ trade booking systems. However, users do not always systematically record the related order messages that precede execution, and those orders which do not result in a trade (including cancellations and amendments). Capturing and monitoring orders, as well as trades, is necessary to effectively and consistently identify potential market abuse.
Article 16(2) of UK MAR requires persons professionally arranging or executing transactions to establish and maintain effective arrangements, systems and procedures for detecting and reporting potential market abuse.
The FCA says that users of web-based platforms may not be able to monitor all their orders to detect potential market abuse. Orders are a critical component in effective monitoring for some types of actual or attempted market manipulation, eg, layering and spoofing as well as cross venue and product manipulation where users have a unique line of sight of their own trader activity. If firms do not capture all unexecuted orders, they may fail to identify this activity.
The regulator has found users’ Compliance / Surveillance teams have varying levels of knowledge about their firm’s use of web-based platforms and associated surveillance gaps. Some have taken steps to understand the quantity of activity happening on those platforms and have ensured both order and trade data is captured for surveillance purposes. However, some Compliance / Surveillance teams are unaware of the platforms used by their front office staff or lack knowledge of the quantity of business undertaken on them, along with the associated market abuse risks.
Where users are not capturing all trade and order data, it is likely these firms will not be meeting Article 25(1) of UK MiFIR order handling and record keeping requirements. These require investment firms to keep data relating to all orders and transactions for 5 years. As well as limiting a firm’s ability to monitor its own activity, failing to capture and record this data may also affect the FCA ability to monitor the market.
Firms that are unable to provide accurate records of when an order was placed on a platform, may be unable to respond satisfactorily to FCA’s regulatory enquiries.
The FCA continues to observe firms using questionable rationales to justify their potential failure to meet their obligations under UK MAR. For example, some firms consider that their own failings can be excused by a perception that some of their peers are failing in the same way.
The regulator reminds operators of trading venues of their obligations to undertake effective monitoring to prevent, identify and report potential market abuse. These operators may also want to consider how they can help users to meet their own regulatory obligations for orders and transactions. This includes providing them with data in a usable format. Failing to do so may prevent clients from trading on these venues.
We also remind operators of trading venues of their obligations to maintain order data according to the standards and formats prescribed in Annex I of the UK version of RTS 24, pursuant to Article 25 of UK MiFIR. Operators must also supply such data when the FCA requests it.
The regulator will continue to visit firms and venues to assess their STOR arrangements, systems and procedures, and work to ensure firms and venues consistently meet their regulatory obligations.