Big Brother watches over exchange-based FX trading as NASDAQ OMX invokes SMARTS

Market and exchange technology provider NASDAQ OMX (NASDAQ:NDAQ) has today announced the launch of its SMARTS FX Trade Surveillance for global foreign exchange (FX) trading.

The SMARTS FX Trade Surveillance module gives surveillance and compliance teams the ability to monitor trading in FX products for possible manipulation of rate fixes, insider trading/front-running, unusual pricing and other suspect behaviors. As a means to monitor and mitigate risks associated with the FX market, the new SMARTS FX offering provides a comprehensive visualization of all trading in individual currency pairs. This includes Spot, Forward, and Non-Deliverable Forward (NDF) instruments – with forthcoming extensions for FX options. This capability provides compliance professionals with an unprecedented view and deeper understanding of trading activity in the context of market activity and rate fixes.

Systems such as SMARTS are becoming commonplace within regulatory authorities, which are able to conduct real time market surveillance, with Australia’s national financial markets regulator ASIC having successfully put a stop to various instances of malpractice in its jurisdiction via use of the First Derivatives Delta Stream system.  Similarly, during the course of last year, Singapore’s monetary authority conducted surveillance on its bank-based FX sector, the largest in Asia, unearthing 133 traders who had manipulated benchmarks and subjecting them to reprimand.

Indeed, such systems are not purely the preserve of governmental authorities, and are equally applicable to technology providers which operate in an aligned ethos with market participants in order to ensure many efficient procedures.

In this particular application, SMARTS enables firms to compare their trading activities against feeds from multiple market data providers as well as their own firms’ quoted spread in a single view, thus eliminating the sole dependency on the content of any single market data provider.

“As the regulatory requirements in the FX market continue to evolve, it has been a challenge for brokers and their compliance teams to identify where to initiate monitoring activity and to focus their resources,” said Rob Lang, Vice President and Global Head of SMARTS, NASDAQ OMX. “Through a co-development initiative with six major FX trading firms, SMARTS has worked to define the behaviors that support the FX surveillance priorities of these industry players, as well as develop a set of now-deployed alerts within the unique data constraints of the FX markets.”

NASDAQ OMX’s comprehensive SMARTS service for equities, options, commodities, fixed income, energy and futures enables compliance teams to source, capture and maintain all trading data elements required to conduct in-depth analysis for cross-market, cross-asset market abuse and market manipulation. Through direct customized exchange feeds and drop copy connections, SMARTS infrastructure sources complete member order and execution data, including private trading data, directly from equities, derivatives and commodities exchanges.

In light of the vastly expensive regulatory conditions which are heading toward Europe’s OTC FX firms, and have already foist themselves on North America’s retail contingent, NASDAQ OMX’s recent plan to develop its FX facilities and this implementation of SMARTS indicate toward the continuing exploration by firms of a future of exchange-based FX trading, in which high level investigations against rate fixing would never come about due to the resultant impossibility of doing so in the presence of an exchange.

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