Analytics to Assist Companies Detect Insider Trading and Policy Violations

by September 29, 2018

Analytics has spread its wonders to corporate governance and investment advisory. A recent survey of investment advisers has shown interesting trends, one being firms perform trading data analytics to identify the use of material non-public information (MNPI), violations of the organisation’s policy execution. In addition, many of them are attempting analytics to prevent the risk of market abuse.

An online study jointly administered by the Investment Adviser Association and ACA Compliance Group collected responses from compliance officers at 454 Securities and Exchange Commission registered investment advisory firms of all sizes. The survey collected responses most from firms managing $1 to $10 billion worth of investment.


Trade Data for Risk Mitigation

Depending on the volume of trading, business enterprises must review and analyse their executed transactions to ensure fairness and equitable client trading which is executed according to its written policies on a periodic basis. According to the survey, most participating firms conduct trading surveillance daily followed next by a quarterly basis in a bid to adopt fairness in transactions. The survey found that one-third of surveyed firms have used data analytics to monitor their trade; about 16% have used third-party software and 17% have relied on internal means. Additionally, over 50% rely on compliance personnel or staff for the initial risk flagging or monitoring the trade surveillance data.

The most common triggers of risk mitigation in the trade data lies in flagging an item of interest during the review which has shown large price movement and volume.


Analysis and Insights

Trade data surveillance and analysis is the best way to ensure the transactions are consistent with a firm’s policies and procedures. Organisations set policies and procedures to protect their clients and secure the financial markets additionally to protect the firm from regulatory scrutiny.

Therefore, organisations typically align with its policies and procedures to mitigate more risky trading activities. The study conducted identified MNPI, misallocation among clients best execution exceptions and market abuse as the main primary goals of trading analytics.


Managing Non Material Public Information

The most common goal of trading analytics of the firms under survey was to manage non material public information (MNPI). The deployment of MNPI to place a trade can violate an organisation’s own code of ethics and the law which can further result in charges of insider trading.

To restrict insider trading, firms must consider employee trading records and employee calendars about meetings with corporate employees/representatives. Additional inputs include restricted lists, corporate announcements or marketing moving news, and watch lists as inputs for the surveillance process.


Best Procedures

The goal of identifying best procedures follows an area of testing focus. About 56% of those firms surveyed give brownie points to trading to find best execution exceptions. Investment advisers should seek the best execution methods for client transactions, requiring the adviser to check many factors while they select a broker.

Analytics must perform best execution reviews by considering relevant factors in a bid to make broker comparisons and have adequate best execution policies and procedures in place.


Misallocation of Securities

An adviser must employ an allocation system that is reasonable and one which does not favour one class of client over another.

For the highest degree of corporate governance, a firm must have a proper disclosure in its core documents and a set of policies and procedures explaining its methods of bunched trades. To achieve this objective, an allocation statement is often employed, where statements allow for procedures at the context of situational emergencies like varied prices within the block or when the order was only partially filled.

The policies and procedures must be in line with the client/firm advisory agreement and the disclosures within the adviser’s Form ADV Parts 1 and 2.


Protecting Market Ethics

Lastly, firms review analytics with the purpose to prevent market abuse and ensure highest degree of market ethics being followed. Analytical algorithms must consider insider trading or false financial information dissemination that may directly or indirectly disadvantage financial market investors.

Regulatory Intelligence is the need of the hour as the firms surveyed have done their best to prevent market abuse through corporate announcements and additionally marketing moving news to help prevent this abuse.