Tuesday, May 12, 2020 Stamford, CT USA — Among the myriad challenges facing trading desks during the COVID-19 crisis is managing the huge number of “false positive” warnings from trade surveillance systems, triggered by massive swings in financial markets. 

“The good news is that investments in trade surveillance and compliance systems over the past decade helped trading desks navigate both the historic spike of market volatility in March 2020 in the face of additional unprecedented challenges, such as shifting the vast majority of staff to working at home,” says Danielle Tierney, Senior Analyst for Greenwich Associates Market Structure and Technology and author of Protecting Market Integrity During High-Risk Conditions.

The issue of managing false positives has created major headaches for some compliance teams lacking enough internal resources and in some cases, even despite stepped-up surveillance capabilities. The market conditions in March 2020 broke normal routines and created abnormal trading patterns that, in many cases, were marked as red flags by surveillance and compliance systems Trade surveillance alert volumes surged more than 600% from January levels for many global market participants, according to data collected by Nasdaq.

“The combination of exploding volumes, spiking volatility and rapid transitions to working from home converged into a perfect storm,” says Danielle Tierney. “For market surveillance and trade compliance infrastructures, these conditions quickly proved and are still proving to be the ultimate stress test.”

Despite the burden of managing these false positives, early conclusions are cautiously optimistic about both the performance of market surveillance solutions and the stability of the financial market infrastructure overall during the crisis. 

After the 2008 global financial crisis revealed the inadequacy of many risk management and market protection mechanisms, the ensuing 12 years brought notable spending growth and innovation in regulatory and risk management technology. However, some regulatory and reputational risks might take time to materialize. In particular, concern over reputational risk is likely to be an even more prominent factor, should inquiries and speculation into potential market abuse occur as the pandemic subsides.