With low volatility levels and negative correlation to equities, fixed income securities have earned their prominent place in investor portfolios. Recent trends have reinforced this value proposition – in particular, high federal interest rates have driven increased activity among virtually all investor profiles. While the Fed’s recent interest rate cut has resulted in average yields falling from peak levels, strong results for Republicans in the November elections could portend a reversal of that trend. Regardless, the bond market remains highly attractive relative to recent history, with the Bloomberg US Agg Total Return Value Unhedged USD index returning 5.8% in Q3 2024.
From a trade surveillance perspective, fixed income has historically been overlooked compared to other asset classes – but that’s changing. In 2024, FINRA has been notably active in its oversight of the bond markets, bolstering its Annual Regulatory Oversight Report with a slate of new topics, including market integrity items related to OTC quotation in fixed income securities.
In fact, both FINRA and the SEC have levied several fines for unfair practices in corporate and municipal bond trading in the recent past, as evidenced by high-profile trade manipulation and reporting failure lawsuits involving industry giants like J.P Morgan Securities, BofA Securities, and Deutsche Bank. The message is clear: regulators will aggressively pursue firms that engage in cross-product manipulation, spoofing, or other abusive trading practices. Market participants must modernize their approach or risk the consequences.
Fixed Income Trade Surveillance: Complexity Abounds
In addition to an increased focus on fixed income, 2023 was the first year that FINRA included market manipulation in its annual Examination and Risk Monitoring Program. Regulators recognize these behaviors as a growing threat to marketplace safety and, accordingly, expect market participants to have a robust trade surveillance process in place. Firms that fail to implement proportionate monitoring programs will be subject to unprecedented fines, reputational damage, and lost business. The additional scrutiny also applies to monitoring for cross-product manipulation, often a new and unfamiliar practice for small and mid-sized organizations.
These priorities take on another layer of complexity in fixed income thanks to the fragmented nature of the asset class. Firms often hold a diverse range of debt instruments – Treasurys, corporate bonds, municipal bonds, etc. – many of which trade at low volumes across multiple venues, which means they are often deprioritized in favor of equities. The illiquidity makes it harder to detect irregular behavior and can increase the impact of insider knowledge concerning interest rates or bond ratings. Additionally, the OTC nature of many fixed income instruments can make it more difficult to capture, consolidate, and analyze trade data.
This complexity makes trade surveillance for fixed income all the more crucial – and for firms with limited resources, all the more difficult to manage. Effective surveillance requires vast quantities of normalized data from fragmented sources, which can place great strain on internal teams. Often compounding these challenges is the ever-shifting nature of the regulatory requirements, which makes it difficult for internal teams to stay abreast of the latest updates and hampers their ability to achieve vigilant compliance.
Creating a Culture of Compliance
For effective trade surveillance amid growing fixed income complexity, industry firms need efficient workflows and the right tools for the job. Having the right technology in place is paramount.
At Surveyor, we understand the pressure firms face in maintaining both efficiency and comprehensive compliance. With hyper-accurate filters that detect the most high-priority forms of manipulative trading behavior, Surveyor’s cutting-edge trade surveillance tools are equipped to help market participants monitor trading activity with an unmatched level of sophistication, depth, and accuracy, so they can stand up to regulatory scrutiny.
Born from the needs of a high-volume, low-latency proprietary trading firm, Surveyor provides easily navigable screens, intuitive visualizations, and familiar workflows as straightforward as clearing an email inbox, so users can benefit from our powerful detection features with as little disruption as possible. Our patented surveillance methodology filters out the false positives, so time isn’t wasted investigating compliant trading activity. In addition, we recently developed report logic specific to fixed income trading behaviors, enabling users to detect market abuse with greater precision. It adds up to an elegant experience that keeps you focused and informed.
Because we know firsthand what it takes to rapidly implement a trade surveillance solution, Surveyor is an alternative to both time-consuming, inadequate manual processes and costly implementations that take an eternity to get off the ground. The platform’s modern approach to data normalization and integration enables us to quickly reconcile mountains of trade data so that users can achieve impact quickly, without straining internal teams. This efficient process means firms can onboard even the most mature fixed income trading businesses with ease, while new bond market entrants can get started in weeks, not months.
With an array of modern capabilities at their fingertips, market participants can pursue their fixed income strategies without fear of financial or reputational damage, detect even the most complex cross-product schemes, and demonstrate vigilance as regulators ramp up their oversight.
The compliance stakes are higher than ever – so lean on the industry standard of trade surveillance with Surveyor. Reach out to start a conversation with our team.
