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Buy or Build? For Trade Surveillance, It’s Now Time to Decide

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By Joseph Schifano, Global Head of Regulatory Affairs, Eventus Systems.

Buy or build?

It’s a question that has long vexed capital markets firms, especially given the rapid evolution of electronic trading and the technological complexity that has come with it. Individual circumstances will vary, but between the numerous vendors and the high level of in-house technology talent that exist in the space, there is a legitimate case to be made on both sides.

Trade surveillance is no exception. No matter how you interact with the markets, no matter what asset class you’re in, the ability to monitor for potentially manipulative behaviours and high-risk activity can help to satisfy regulators, maintain compliance, and impart peace of mind to clients and prospects. While some firms choose to build their own surveillance systems, there are many outside providers – including Eventus – with solutions in this area, and the direction you choose can have a major impact on functionality, flexibility, cost and other considerations.

Our Validus platform was originally built for in-house use, but we eventually spun it out into its own proprietary technology as a flagship Eventus product for other clients looking to buy. Our first-hand experience is proof that both buying and building are viable. But no matter what path is chosen, increased regulatory scrutiny and growing trading volumes mean it is essential to act now. As they consider their next steps, firms need to assess carefully the merits of each approach and come to the best decision for their business.

The Case for Buying

There are many considerations that could point toward working with a vendor for trade surveillance, but among the most universal are power and scale. With a third-party solution, clients get a product that is constantly evolving to meet the requirements of a rapidly changing regulatory landscape. Enhancements based on feedback from a single client can be delivered to the entire customer base, and the surveillance algorithm ingests data from a wide ecosystem of alert candidates, fueling constant growth and improvement.

In contrast, in-house systems start to depreciate from the moment they are built – firms need dedicated teams to ensure their proprietary infrastructure is incorporating the latest market dynamics, regulatory considerations and more. In addition to trading considerations, keeping up with new and existing technologies that support surveillance becomes paramount. The need for internal IT support is greatly magnified.

The quality of support and expertise is another reason to work with a vendor. The ability to glean insights from dedicated professionals who make their living on trade surveillance is valuable, as this level of know-how (both technological and regulatory) can be very expensive to have in-house. Chances are that support staff at vendors have a better opportunity to understand the ‘wisdom of the crowd’, while in-house surveillance staff run the risk of not keeping pace with the latest thinking on surveillance techniques. While vendor billings are avoided, firms may end up paying more to retain consultants who can ensure proprietary systems are up to snuff. The expertise and scale of a vendor almost always leads to quicker time to market.

Proprietary systems can also cause significant ‘key man’ issues. Internal developers may lose interest in maintaining the internally-built surveillance tool in favor of working on the next interesting project. If the internal developers leave, the company may be left with redundant, unusable code, forcing a start from scratch. Conversely, third-party systems can provide expert training and support right from the source in the event of any staff departures.

It’s important to keep in mind that internal systems are necessarily tethered to internal structures. For some firms, this could mean insufficient independence between the developers building alpha-generating software and the team building the surveillance software, inviting conflicts of interest. In other cases, the alpha-generating team may have heavier incentives than the surveillance team, meaning the latter project might suffer from a lack of resources and less motivated staff.

There’s also the monitoring itself. Vendor-provided surveillance solutions often have the scale to deliver a single normalized view of all data streams to form a holistic trade surveillance view. This is an extraordinarily difficult task to accomplish in-house, so it is almost never done well (if it is undertaken at all).  Resources required to amend or update surveillance tools as rules change or the business scales might be constrained. Limited resources might also introduce a confirmation bias that rationalizes legacy methods when new ones are necessary.  Ultimately, working with a third party for trade surveillance can streamline technology and compliance workflows, enabling greater focus on profit-generating activities while boosting power, efficiency, effectiveness and accuracy. The wisdom of the crowd may be fully realized.

The Case for Building

Let’s say you have done your due diligence on evaluating available third-party solutions and nothing met your requirements or expectations on timeframe, budget or performance. The next step is to evaluate the expense of building and maintaining an in-house solution.

Power and scale are important elements of every solution, but they aren’t everything. Building proprietary systems means firms can maintain full control over the project and develop a custom, bespoke solution for their own use. For those that deem vendor platforms overpriced or inadequate, whether in terms of sophistication or workflow accommodation, this can be a powerful draw.

As comprehensive as third-party solutions can be, there’s no getting around the fact that they require some level of reliance on an outside entity for delivery, support and maintenance. Building means the ability to take full advantage of any in-house expertise, prioritize the most critically needed functionality and scale in lockstep with the company’s growth and evolving needs. In contrast, firms that depend on a vendor may have limited input to the product roadmap and deliverables. Customer support can also be hit-or-miss, a particular concern for clients who have been let down in this area before and have a high degree of trust in internal staff.

Cost is often another important factor in the decision to build, which enables close control over expenses and prioritization according to budgetary concerns. The cost of a third-party surveillance platform can quickly spiral out of control – we’ve all encountered vendors with punitive or opaque charging models. There’s also the risk that comes with signing a lengthy contract for a solution the firm hasn’t even used yet – what if it can’t handle the job? Then there are the tried-and-true fears of giving highly sensitive data to an outside entity. It’s a concern that has been lessened in part by decades of successful vendor partnerships, but a potentially significant one all the same.

All of these are legitimate concerns, but the fact is that in many cases, they can be obviated through thorough due diligence, open communication, effective negotiation and the like. By viewing potential issues of cost, control and support not as dealbreakers, but relevant considerations that can work themselves out through collaboration and the right approach, firms can ensure they are leaving no stone unturned in assessing the best path to implementing effective market surveillance, including building their own.

The Surveillance Imperative: Act Now – or Get Left Behind

As you can see, the buy-or-build decision is a complex one. The right path will depend on a firm’s internal expertise, technology resources and position in the market and culture – but one thing that is certain is that the time to act is now.

Growing regulatory scrutiny, heightened trading volumes and increased due diligence among market participants are all powerful reasons for adopting or strengthening trade surveillance systems. For nascent markets such as digital assets, the need is even more acute – a wave of oversight is coming to this space, and having robust systems in place is an essential part of demonstrating a commitment to fairness and transparency to relevant entities.

Sure enough, a report from Allied Market Research projected the size of the global trade surveillance system market to more than triple by 2028. Market participants cannot afford to be laggards – if they wait until they judge their business to be large enough to invite scrutiny or for the regulators to come knocking, it will be too late. Firms must implement these systems now so they can navigate any future challenges with speed, efficiency, compliance and, above all, fairness.

It all starts with choosing your path: Buy or build?

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