Integrated surveillance provider SteelEye has launched a new feature designed to protect financial institutions against the emerging threat of cross-product market manipulation, also referred to as cross-market spoofing. The new feature, Cross-Product Detection, helps surveillance teams identify and address manipulative practices across multiple asset classes and platforms.
Cross-market spoofing is an increasingly sophisticated and challenging form of market manipulation that involves placing genuine orders in one market while simultaneously placing deceptive spoof orders in a closely related market. This practice exploits the interconnectedness of cash and derivatives markets and is difficult for surveillance systems to detect, particularly in the highly interconnected over the counter (OTC) and high-frequency trading (HFT) markets. See the Whitepaper Best Practice Approaches to Cross-Product Market Surveillance from A-Team Insight for more on this topic.The spoof trade is typically placed in the more liquid market (e.g. equity futures) with the genuine trade being placed in the less liquid cash market. The trader cancels the spoof trade anticipating that it’ll be lost in the noise of high-liquidity volume. By creating a false perception of supply and demand, manipulators can influence the price of related assets, allowing them to profit from trades placed in the less liquid market.
Regulators have been increasingly vigilant and sophisticated in monitoring cross-product manipulation, with several high-profile enforcement cases emerging in the last decade across the US and UK with cumulative enforcement penalties in the tens and hundreds of millions of dollars. In on example, a global bank faced a $35 million penalty after the US Securities and Exchange Commission uncovered that one of its traders had manipulated the close relationship between US Treasury securities and futures contracts, exploiting cross-product dynamics for illicit gain.
SteelEye’s new Cross-Product Detection feature leverages advanced algorithms to scrutinize trading activity across various instruments, effectively identifying patterns indicative of cross-product manipulation. By detecting suspicious correlations between trades across different markets, the system highlights hidden relationships that might otherwise evade detection.
According to Matt Storey, Chief Product Officer at SteelEye, Cross Product Detection balances the need for detection sensitivity while minimizing false positives. “SteelEye’s platform captures all of a firm’s structured and unstructured data across any asset class, communication type, and system – unifying it under a single lens. By integrating this data, our Cross-Product Detection feature significantly enhances the accuracy of market manipulation detection, reducing false positives and allowing firms to identify and swiftly respond to complex manipulation tactics” explains Storey.
Once flagged, the system issues a potential market abuse alert, enabling compliance teams to swiftly assess whether the activity is of genuine concern, or a legitimate market behaviour influenced by cross-product interactions.
Emphasizing the importance of advanced surveillance capabilities Storey cautions, “As financial markets become more interconnected and manipulation tactics grow increasingly sophisticated, firms must ensure their defences are as robust as possible. Cross-product surveillance is no longer optional – it’s essential for maintaining market integrity. Regulatory bodies will continue to focus on this issue, and firms that fail to adapt could face significant penalties.”
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