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Trade Surveillance – Monitoring News and Social Media to Detect Insider Trading

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By Helen Bevis, Head of Operations and Strategic Partnerships at SteelEye.

To mitigate and manage the risk of insider trading, firms need to use the best tools to effectively identify, investigate and report on signs of wrongdoing. A key component of this is access to benchmark data, which for insider trading should include both news and social media.

In fact, including social media and news data in market abuse detection is now a key practice that all compliance teams should adopt. This is because this data can quickly and easily highlight trades being conducted in advance of information appearing in the public domain and therefore help teams to investigate if there was any wrongdoing.

The big question is, why is this practice still regarded as a ‘nice to have’ and not a necessity? Especially when incorporating this data can significantly improve the accuracy around the detection of insider trading, one of the most common causes of market abuse.

Prioritising insider trading detection

The FCA is cracking down on insider trading, especially in light of the Covid-19 pandemic, where the FCA has said that it expects firms to proactively monitor for insider dealing in the new, remote working environment.

To identify potential insider trading, the regulator uses trade data reported through MiFID II. If it finds any suspicious activity, the FCA thereafter expects firms to be both aware of what has happened and to be able to provide further information, quickly. According to some compliance teams, the regulator now also asks about news and social media monitoring when they speak about insider trading detection.

A recent case of insider trading , where pay-as-you-go phones and cash were used to evade communications monitoring, shows how important relating trades to news events can be for a belt-and-braces approach to detection.

Looking more widely, we have also seen a tightening of insider trading laws in other jurisdictions, such as the US, where a potential insider trading scandal brews related to two senators selling millions of dollars in stock shortly before the markets crashed in response to the Covid-19 pandemic.

Finally, insider trading and leaked trade secrets are also a commercial risk for firms, as lawsuits seeking compensation are becoming more common.

Setting the right course

To effectively monitor and detect insider trading, compliance teams need to understand – quickly and clearly – how trades relate to what has been published in the news or on social media.

For example, if a trader buys 5,000 shares in ABC Company, and does so the day before a positive story is published about the company in a newspaper, this could indicate that the trader has been privy to materially non-public information (MNPI) and should be investigated. In addition to understanding the link between trades and global affairs, compliance teams also need to be able to view that relationship in the context of other data, such as trade volatility and volumes, as well as corporate actions.

As a result, it is important that compliance teams have the ability to capture all of their firm’s structured and unstructured data, alongside reference, market, news and social media data, and have the tools to monitor that information holistically.

Reducing False Positives 

Just as important as being able to detect insider trading by using news and social media data, is the ability to reconstruct and report to the regulator the events related to a suspicious trade or order. Since March, many compliance teams have been deluged with market abuse alerts. Some of these will be false positives because of increased market trading volumes and volatility. However, compliance teams need to investigate them and in the current climate, there would be significant negative consequences for labelling an alert as a false positive, only to have it turn out to have been indicative of an event all along.

In this context, using news and social media data can make a significant difference, particularly when paired with an automated trade reconstruction solution. Compliance teams can see, based on material impact, time frame and relevance parameters, the relationships between a trade and global events, and at the click of a button bring in any other relating information, greatly accelerating the time it takes to investigate a trade. Having this capability enables compliance teams to scrutinise alerts quicker and with more accuracy – reducing the time it takes to work through a caseload.

Looking forward

As the Covid-19 pandemic continues, both the FCA and industry bodies such as the Fixed Income, Currencies and Commodities Markets Standards Board (FMSB) are saying that while some traders have returned to the office, others are expected to work from home and other locations for some time to come. In this working environment, compliance teams need to enhance surveillance by using news and social media data to better detect and investigate insider trading. Having this capability in the current circumstances can help firms protect their reputations, keep regulatory relationships positive, and reduce an increasing source of commercial risk.

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