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August 23, 2017

Real-time Monitoring: reducing reputational risk in trading systems 

What can various stakeholders in electronic trading do to minimise technological risks and protect their reputation? 

By Ellie Burns

In 2012 Knight Capital lost $400 million in just 30 minutes due to glitches in newly deployed code. This catastrophe became the infamous poster child for the hazardous reputational consequences of a poorly monitored trading infrastructure. Consequently, the creation of safeguards to monitor and anticipate problems in complex IT systems has since become essential.

The principle question is: what can various stakeholders in electronic trading do to proactively minimise technological risks and protect their reputation?

Reputation is fundamental for a business, but can be easily tarnished. For example, when a bank does not fulfil expected obligations to its stakeholders, including customers, the regulatory board and the public at large. On a managerial level, acts that damage reputation include financial mismanagement and breaching company or legal regulations. On a lower level, poor customer service and inappropriate behaviour may also pose a risk.

Real-time Monitoring: reducing reputational risk in trading systems 

Jay Patani, Tech Evangelist, ITRS

However, reputational risks which occur from human error and misconduct are no longer the only threat.  As our environment becomes increasingly automated, technology is also a key driver of reputational losses. The high-octane world of financial trading is a prime example of technology’s contradictory effects.  On the one hand, algorithms and machines can eliminate labour and make processes, such as executing trading strategies, both faster and more efficient. On the other hand, when mistakes do occur, they are often catastrophic in proportion.

The increasing electronification of trading has developed the most rigorous audit process available to date, but banks’ inability to maintain and process this information often leads to disasters.


Investment banks

Investment banks provide execution services to traders including algorithmic trading, order routing and direct market access across different venues as well as, sometimes, in-house (such as a dark pool). The complexity of a bank’s IT operations, including a myriad of applications, servers and users, often poses a monitoring challenge. In addition, as regulatory obligations increase, banks have a growing pressure to stamp out illegal or abnormal activity and to provide more meticulous reporting.

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In 2013, a $2.3 billion fine was imposed on six global banking giants by the EU for rigging the Libor rates.  The employment of a real-time trade surveillance system would have, in the majority of these cases, provided early indications of illegal activities, thus minimising the damage.  By analysing a combination of network data flowing through multiple systems and real-time log data from applications, banks can have complete real-time visibility of trading activities.  This data can be visualised or stored for compliance purposes. By having one window into different systems, banks can bring illegal activity out of its hiding place more quickly and into the hands of compliance professionals, and not the newspaper headlines. Furthermore, this data can be mined for market intelligence on how and what clients are trading, and banks can use these insights to drive their strategies to achieve and maintain a competitive edge.



Similar to large investment banks, a highly distributed trading and market data infrastructure forms the core of global stock exchanges. With increasing trading volumes and high-speed trading, exchanges are pressured to both optimise operational performance and to meet customer and regulatory expectations.

Millions of trades occur per second, and exchanges must process every one of these at real-time prices and offer quick access to liquidity. Maintaining the underlying IT system is essential, exchanges must monitor their complex infrastructure in real time and correlate all order events as they encounter gateways, middleware matching engines and market data streams. Tracking trades requires pulling information from different sources across the trading infrastructure and using high-performance analytics to calculate latencies between the various checkpoints in the lifecycle of each trade. This information can then be cross-analysed to see how execution performance differs across variables, such as times of the day, different clients and different symbols.

READ MORE: Blockchain to become the new plumbing of finance, says UBS

Just as the consequences of poor performance within stock exchanges is felt by the rest of the financial system, including the broker-dealers, market-makers and the end-investors, the positive effects of having good technology will also be felt and recognised.

If fines, losses, and reputational damage do occur, firms need to take immediate action to remedy and minimise damage. However, prevention is always better than the cure and this is where technology plays its part. Better technology leads to better decision-making and ultimately minimising avoidable errors. It not only mitigates risk, but also provides a competitive advantage, giving financial institutions better visibility into what is going on in their business, and how to use it to their advantage.

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