For over 20 years, b-next has provided complex trading surveillance and compliance across all venues and asset classes. Though focused on German-speaking European countries, with clients such as the German regulator, BaFin, exchanges and banks, the vendor is now branching out into the UK first with clients and with others, such as MTFs, in the pipeline.
Using a modular approach, b-next’s clients, some of which perform hundreds of thousands of transactions per day, can get “cockpit” applications, allowing them a graphical view across silos in order to interpret market behaviour while flagging trouble spots.
SLT: Can you tell me about b-next’s short selling market surveillance module?
Wolfgang Fabisch: Short selling was a very hot topic in Germany about 16 – 18 months ago, when there was the first short selling ban on certain bank securities and we became one of the first companies offering a solution for short selling avoidance. Getting real-time data is a challenge for companies to see if they do hold securities or equities of an instrument. They need to ask the question, “do we have these instruments in our books or not?” “Are we short selling these instruments or not?” It is one of the most difficult problems in the market because the instrument may be in different books within the company, so people need to have a different view over different silos.
The system will inform you if you are selling a banned stock short and then there are options to handle the problem.
Possibly the decision will get made to sell a smaller quantity or, if there is more of the stock in another book [the system] can find it. But it will stop the organisation from being short at the end of the day.
SLT: Apart from the short selling bans, which regulations are you hearing about most from clients?
Fabisch: We get a response from the market on the Market Abuse Directive II [which will regulate financial instruments as defined under MiFID and cover exchanges, OTC and MTF trading venues].
We understand that the regulators in the UK and Germany, but also in France, Italy and Spain are going to be very tough in looking after this regulation, it is a big influence in the market at the moment. I don’t see much response on MiFID II although I do see market participants looking at Dodd-Frank, but I don’t think it will influence the market until the second half of 2012. Still, there is concern over regulatory paperwork for those companies doing business in the US for example.
SLT: In developing market surveillance tools for short selling, do you participate with the securities lending industry?
Fabisch: Not yet, we are working here in Germany with some of our customers who are a part of that community, but as a company we don’t have any partnerships.
One notable development though is that we are offering our applications out of the cloud. This is important for medium sized or small companies in the community because it does mean there will be a cost reduction on the regulatory side. They will not have to have their own hardware platform or pay large sums for upfront investment in getting the software for doing their compliance and market surveillance function. For this, we use the Thomson Reuters Elektron platform as the medium to deliver our application to the industry. This is one of the most important things we are doing now and I think it will develop very fast.
SLT: What are some of the notable successes customers have had using the short selling market surveillance module?
Fabisch: I can give you one example, which has nothing to do with any specific fraud. One of our customers many years ago, came back to me saying that he is earning back the costs of the system in two weeks because it catches so many fat fingers.
He put the number at an earning of around ½ euro per transaction after doing the calculation for all the transactions he had and the thousands of euros that would have been lost if the fat fingers were not found.
Using our system, our customers are catching things that are going wrong though these might not be criminal activities. Very often, market surveillance people are going back and saying, we are taking a higher risk on this transaction than we want to take. It may not be the volume or amount of the transaction, but the premium that a dealer may want to put on a stock is higher than the risk policy allows because they believe their strategy will earn more than the cost. So, market surveillance can look after their dealers and make sure they are in line with the risk taking policy.
SLT: What do you think are the most significant trends from the vendor’s point of view?
Fabisch: What I hear from the market when I am talking to our customers and our prospects is that they are fed up of regulatory stuff. It is a driver we need, but the reaction is that they don’t like it and want to spend as little as possible on it.
More and more though, our customers understand there is another side of the matter, there are these fat finger problems I talked about, there are these risk policy things, there are operational risks they need to be aware of and at the moment they do not want to take reputational risk any higher.
There is more of a risk avoiding approach in the market. People want to understand - where are the risks in my business, which ones do I want to take, and where do I want to lower my risk? It is a precision approach that is developing.
Another trend I see coming down is that surveillance will become more real-time than it is today or at least near time. I know many institutions which are doing their surveillance on a monthly or weekly basis, now many of them are coming to daily market surveillance they are looking for T+1 - business they did yesterday, they are looking at it today. With market abuse scenarios, they have to get closer to the transaction time so I think we will see market surveillance within hours or even minutes. In some cases, like with algo or high frequency trading, we will have to go down to seconds.
I think many people understood that HFT and algo trading are exciting developments but also dangerous, as we saw in the [May 2010] flash crash and that we have to find rules and tools to manage this risk as well.
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