A few decades ago, most economies were hardly linked to the global financial world. Today, cross-border flows are the standard and big financial institutions dominate the global economy. The world has been on constant development and revolution. This has not left out the capital markets, which have equally been faced with tremendous growth and development.
Behind many of these overwhelming changes and the quick development of the world’s capital markets, is the constant evolution of the technology used for actual trading. This can be seen in the possibility of simultaneously issuing securities in different jurisdictions as well as the ability to trade 24 hours a day in the markets.
We are already seeing intelligent machines, as a result of Artificial Intelligence (AI), perform trades in the market. All these developmental changes in technology are welcome as they have made the markets more complex, sophisticated and extensive and in the long run, they add much value to financial markets.
With the above unpredictable nature of global capital markets, there is need to ensure that investors interests are well protected. In addition, deep and well governed capital markets foster financial integrity through market discipline and ensuring alignment with internationally accepted standards on accounting practices, transparency and governance, among others. To achieve this, we need inter-linkages of the markets, information sharing and strengthening of the surveillance systems which regulators use to surveil the market. With greater inter-linkages of markets across the world, comes the growing challenge of identifying potential market misconduct.
In the US, two Self Regulating Organisations (SROs), namely NYSE Regulation and the Financial Industry Regulatory Authority (FINRA) entered into agreements with ten US securities exchanges to enhance investor protection by consolidating the surveillance, investigation and enforcement of insider trading in securities. The arrangement allows NYSE Regulation and FINRA to implement across markets their state-of-the-art insider trading surveillance and investigation programmes for all listed securities in the United States. The agreement has seen reduced irregularities in their market as well as enhanced investor confidence.
NYSE Regulation for instance is responsible for monitoring activities on the NYSE’s equities, options, and bonds markets including the New York Stock Exchange LLC (equities and bonds), NYSE Arca, Inc. (equities and options), NYSE American LLC (equities and options), NYSE National, Inc. (equities), and NYSE Chicago, Inc. (equities) (collectively, the “NYSE Exchanges”) – and for addressing non-compliance with the NYSE Exchanges’ rules and federal securities laws.
In India where there are 19 exchanges in the country, to encourage effective and collaboration between the regulator and the exchanges on surveillance, an Inter-Exchange Market Surveillance Group was established. The group is headed by the Securities and Exchange Board of India (SEBI). In the same breath, in Pakistan, an Inter-Exchange Surveillance Committee (IESC) was formed with representatives from three stock exchanges in the country, together with the Securities Exchange Commission of Pakistan for effective coordination of surveillance activities.
Therefore, a practical surveillance tactic and the application of dynamic standards and parameters reflective of dominant market surroundings are now vital to successfully detect market malpractices. For instance, authorities should incessantly appraise and improve their alert conditions and parameters to suit their markets to provide for early detection of market malpractice. This will greatly improve the market confidence and see more uptake of capital market products.
In Kenya the Capital Markets Authority (CMA) has not been left behind by the global changes and has been voted as the most innovative regulator on the continent for four successive years. In line with CMA’s drive towards implementing risk-based supervision to improve surveillance and protect investors, the Authority is set improve its surveillance through acquisition of a Multi-Asset Surveillance System to monitor activities in the capital markets both in the equities and derivatives markets. In addition, the CMA in its implementation of a Business Intelligence solution is considering information sharing through Application Programme Interface (API) integrations with other like-minded institutions to enhance its surveillance and reporting capability.
Interlinkages however come with challenges which mainly centre around human and financial capacity, infrastructure compatibility and collaboration efforts among others. All these challenges can however be overcome by adopting strategies such as fostering greater collaboration and networking, enhancing dialogue with stakeholders, training, adequate resourcing, forming funding partnerships and adopting new ways of infrastructure upgrades such as cloud computing.
It is imperative to note that up to standard market surveillance systems are a must for risk mitigation with the changing market landscape, where technology is becoming a key driver of business transactions.