By Lisa Balter Saacks, President, Trillium Surveyor
If you’re reading this, you’ve probably already lost sleep over the SEC’s expanded dealer definition.
The details remain vague. While it seems likely that many proprietary trading firms will be affected, the truth is we don’t yet know the precise firm types, asset classes, or trading behaviors that will be impacted. But the bottom line is that if your firm does fall under this expanded definition, you will need to register with FINRA as a broker-dealer. For many prop shops and firms like them, that mandate introduces an entirely new layer to their compliance operations.
There are numerous standards associated with FINRA registration – capital adequacy, contingency planning, recordkeeping, and many more, with extensive documentation and disclosure required for each. If you’re working through these mandates, you can’t afford to overlook what may be some of the less familiar aspects of showing compliance as a dealer. Trade surveillance is one example of a control that FINRA closely scrutinizes, but that may be off the radar for some firms that fall under the expanded definition.
The Road to Rapid Trade Surveillance
Most proprietary trading firms don’t have a particularly sophisticated trade surveillance program. For many firms, it’s just a matter of pragmatism – it hasn’t been required, so as long as they can detect a few of the more prevalent types of manipulation, why expend the resources to do more? For others, incidents are rare enough that the head of compliance and head of trading can work together to address anomalies in a manual fashion, even if it takes time out of their workdays.
My company’s story shows why that approach isn’t good enough. Nearly 15 years ago, proprietary trading firm Trillium was fined over $2 million for market manipulation and related supervisory failures, sparking a serious reexamination of the firm’s compliance program. They found that no commercially available trade surveillance platform was equipped to meet their requirements in terms of accuracy, performance, or ease of use – so they built their own. Fast forward a few years and that product spun out into its own company: Trillium Surveyor, the independently run software provider that I lead today.
The results speak for themselves. Since the launch of Surveyor, Trillium Trading – effectively our first client – has never been fined. Many of our other users are heads of compliance who rely on Surveyor to serve as an analyst, task manager, and operations staffer all in one. We know what it takes to quickly implement a robust trade surveillance program to guard against regulatory enforcement actions. Now, with the expanded dealer definition, the stakes are even higher.
That might sound daunting, but by adhering to a few basic guidelines, you can make sure your firm is on the right track:
- Speed and Flexibility – When it comes to regulatory deadlines, rapid implementation and easy configuration are key, so look for systems with an API-driven, cloud-based architecture
- Modern Workflows – User-friendly features like intuitive visualizations, smart alerts, and straightforward reporting tools can have a powerful streamlining effect for compliance professionals who are busier than ever
- Powerful Surveillance – Attributes like depth, accuracy, coverage, and sophisticated detection are crucial, as is the ability to minimize false positives so that your bandwidth is protected
Prepare Today to Comply Tomorrow
The above are good basic guidelines for firms that lack trade surveillance today. But even those that successfully use a basic in-house system or manual process should reexamine their approach in light of the new compliance requirements. Regulators tend to view use of third-party platforms instead of proprietary tools as a signal of investment and stability, so they inherently strengthen an application to FINRA. It’s just one more factor that should feed into this complex decision, in addition to functionality, ease, and cost.
Time is of the essence. While firms will have at least a year to comply, scrambling to meet a deadline of this magnitude is never desirable, especially given the many different challenges of dealer registration. Trade surveillance is one area where an outside solution can meet virtually all your needs, so it can effectively serve as an accelerator for the entire process. The longer you’ve been in compliance with FINRA’s requirements, the more readiness you will demonstrate. That’s why we urge you to start thinking about your next move today, even if key elements of the new requirement remain uncertain.
Bottom line: we realize how difficult the coming months will be for already strained compliance professionals. Let trade surveillance be the easiest decision you make. Our expert team understands exactly what regulators are looking for and can help you understand what’s required to rapidly set up comprehensive protection and monitoring. As you assess the landscape, we encourage you to think long-term and identify solutions that can scale as you grow, adopt new asset classes, and encounter future regulatory shifts. Trade surveillance is always a worthwhile investment, regardless of the current climate, so it makes sense to proactively prepare for an uncertain future – before your next big wave of business growth or the next burdensome rule change.
With the right approach, you can ensure a far easier registration process while minimizing your risk of regulatory fines in the future. From implementing trade surveillance for the first time to improving accuracy and detection to ensuring registration for all your traders, the right combination of technology, expertise, and support is a powerful foundation for solving nearly any challenge.
Want to learn more? The specific capabilities that will be most impactful will depend heavily on your firm’s specific challenges, so we welcome the chance to sit down with you and hear about them. Let’s set up a call today.