Estimated reading time: 6 minutes
Data is king, especially as the industry slowly but surely embraces the move towards full digitalisation.
Increased digitalisation, and the mountains of data that comes alongside the transition also requires additional regulation and collaboration.
With this in mind, TFG spoke to Jonathan Dixon, Head of Surveillance at eflow Global.
1. Please give a quick introduction for our readers. Who are you, what is your background?
I’m Jonathan Dixon and I’m Head of Surveillance at eflow Global. In the first part of my career, I worked in business analysis, focusing on data and management information (MI). The second half of my career has been dedicated to trade surveillance. I’ve had the opportunity to work with a range of institutions, including tier-one banks, consultancies, crypto exchanges, and vendors.
Throughout these years, I’ve spearheaded the implementation of trade surveillance systems, the development of comprehensive risk assessments, and building and leading specialist teams.
2. How does eflow Global utilise technology to enhance regulatory compliance and operational efficiency for its clients?
I would say there are several facets to this question. At a high level, we offer trade surveillance, eComms surveillance, best execution, and transaction reporting solutions to fulfil the regulatory obligations that firms face under the likes of the FCA, SEC and FINRA, in addition to specific regulations such as MAR, EMIR Refit and MiFID II, to name just a few.
Our utilisation of technology is relatively novel, particularly through highly configurable, contextual parameterisation. This means we don’t just look at parameters related to potential market abuse, but also the surrounding context. For example, instead of only examining a price movement in a given instrument, we consider the instrument’s volatility over the previous 90 days. This helps us determine if the movements in question are significant relative to their typical behaviour.
Our technology also offers advanced graphical visualisations and highly efficient, automated workflows. These tools facilitate the escalation of alerts between users and management and provide valuable management information. Together, these features help build a truly holistic regulatory solution.
By combining trade surveillance, which is retrospective, with e-comms surveillance, which is prospective, we have created a comprehensive tool for our clients. The trade surveillance element monitors orders placed and trades executed, while the e-comms surveillance tracks communications to identify potential indications of market abuse before it’s taken place. Combining these two perspectives allows us to build a holistic picture that greatly reduces the volume of false positives compliance teams need to review and helps them to get to their risk quicker.
While our technology uses AI and machine learning to improve efficiency, it’s also important to state that we don’t rely on it solely to reduce false positives. This is because we believe in maintaining accountability for setting parameters and thresholds, which helps firms to avoid the pitfall of deferring to a computer’s decisions without explanation. Instead, we provide efficient methods to minimise false positives by analysing market conditions and how trades were executed in context.
3. What are the key challenges that financial institutions face today in terms of compliance?
The first challenge is the size, scale, and scope of the data that firms are dealing with. They are expected to process data from disparate sources and in huge volumes. So, how do they deal with and integrate this data into trade surveillance systems? And how do they then analyse, draw inferences and generate alerts from it?
Each of our regulatory modules are built upon a single system architecture, known as PATH. This is data agnostic, which is critical in addressing these challenges. This means it can consume vast amounts of data from multiple disparate sources and run our trade surveillance, eComms and best execution platforms on top of it. Essentially, we can ingest the data, process it efficiently, and use it to drive all of the required alerts.
When it comes to ensuring firms adhere to regulatory rules, there are two key elements. The first is maintaining compliance by conforming with their risk assessments. While firms must ultimately own this process – by identifying potential risks in their trading activities and conducting assessments to mitigate these risks – eflow provides a platform that facilitates quicker identification of these risks and generates the necessary alerts.
Collaborating with clients is also a step key to share insights from other similar firms, such as buy-side firms and retail brokers, for example. This helps us provide industry-standard guidelines and assist clients on their compliance journey. However, clients must still take responsibility for their own risk management, and our role is to help them identify and address these risks more efficiently.
4. Can you discuss any recent trends in the financial compliance industry and how eflow Global is adapting to these changes?
There are two main points to address here. Firstly, on a general level, it’s crucial for firms to have robust risk assessments and processes in place. This was highlighted by the fines imposed on Citigroup and ADM Investor Services in 2023. These fines were not for actual abuses taking place, but for failing to have adequate risk assessments and processes to mitigate those risks. Citigroup, for example, was fined £27.766 million for not having risk assessments related to algorithmic trading and high-frequency trading.
This does not mean their algorithms were causing market abuse, but rather that they lacked the necessary processes to mitigate potential risks. Regulators like the FCA are not just penalising firms for committing abuse but also for failing to have preventive measures in place.
We help mitigate these risks by providing a platform that inherently supports compliance and risk management. Our system ensures that firms can effectively manage and mitigate their risks, simply by using our technology.
Secondly, regarding the future of technology in regulatory compliance, the FCA’s ongoing Tech Sprint is a significant development. This initiative focuses on how AI and machine learning can solve various problems within the trade surveillance space. I am actively involved in this effort, and it underscores the regulator’s interest in not just current risk mitigation practices but also future capabilities. AI will play a crucial role in this.
While there are concerns about AI being used to perpetrate market abuse, as demonstrated by Apollo Research where AI used insider information to make a trade and then cover it up, the real value lies in using AI to identify causal relationships between different asset classes, products, and markets.
For instance, let’s imagine that an aviation parts supplier has a longstanding relationship with an aeroplane manufacturer. If the manufacturer wins a new global contract that means they’ll be purchasing large volumes of parts from the supplier, the stock price of the supplier is highly likely to increase. The question is whether AI will be sophisticated enough to identify the causal effect of these individual events and join the dots.
By understanding these relationships, AI can help firms identify and mitigate risks more effectively. It’s not about using a black box to decide what alerts should be generated, but about using AI to identify these relationships and get to the root of the risk.
Ultimately, firms need to make a concerted effort to understand their risks and mitigate them effectively using SaaS solutions. While we would like firms to choose eflow’s technology, the key is to use explainable methods to identify and manage risks as efficiently as possible.