Conceptual dynamics on the trade surveillance market : A study of changes in the Swedish trade surveillance market in conjunction with MiFID2/MiFIR and MAD2/MAR

Abstract: Financial markets have been subjected to numerous regulations during the last two decades. MiFID2/MiFIR and MAD2/MAR are two extensive regulations that will apply on European level during 2016 - 2018. Both these regulations stress areas that are of relevance to trade surveillance. Trade surveillance systems are IT systems applied to the market for financial instruments to identify market abuse or other harmful patterns in participants’ trading activity. The purpose of this report is to map the market of trade surveillance technology in Stockholm, Sweden, and examine the impact on these actors in conjunction with the regulations. Since MiFID2/MiFIR and MAD2/MAR are extensive regulations, these were condensed to key points that were considered as relevant for surveillance.   This research is a qualitative study and data was gathered by interviews with market actors. A pre-study and a literature study were made. These were used as basis to construct an analytical framework for market dynamics, which was used as a descriptive concept to design interview questions, structure data and analyze results. The framework was named Market Dynamics Framework and considered the macro-environmental factors: Technology, Actors’ preferences, Market structure and Regulations.   The market was segmented in order to more accurately examine regulatory impact. Market actors were divided into four groups. The results were analyzed according to the framework and for each of the segmented market actor groups. Preference of surveillance solution was shown to be one distinct difference between every segment. A purchased surveillance system from a vendor was most common, and actors of smaller scale preferred to outsource.   The market is concluded to be prepared in terms of having systems and arrangement for monitoring trades in place. Expected impact is mostly related to new market structures and more detailed data of larger amounts. Increased capacity need for surveillance departments is expected in combination with a need for more advanced technologies; e.g. automatic screening of social media, efficient minimization of false positives, functionality coverage for a broader range of financial instruments.   This research introduces two concepts as descriptive frames, Market Dynamics Framework and a segmentation. These are proposed as methods when conducting a market analysis. A validation study for these methods is suggested as a possible topic for future studies.