Wednesday, January 19, 2011

“If You See Anything Suspicious…”

In today’s seemingly terrorism-filled world, people are becoming accustomed to being watched and monitored. The tolerance comes from the hope that the relevant authorities will catch would-be criminals before they do any harm. (Or, at the very least, ID them after the fact for punishment.) Closed circuit television cameras (CCTVs), phone tapping, stakeouts by police are all traditional and ways of monitoring the population for criminal activities.
In London the number of CCTVs has increased exponentially in the past few years. Ignoring cries of civil liberties violated and privacy invaded, the London Metropolitan Police have been quietly increasing the number of cameras (from 21,000 in 1999 to nearly 60,000 today) leading to more criminals caught. According to BBC News and the Met, in 2010 the number of suspects identified by the camera system went up to 2,512 in 2010 compared to 1,970 identified in 2009.
When it comes to monitoring financial markets, things get a little trickier. Few regulators are equipped with the technology or the expertise to monitor markets for abuse and/or mistakes. This is partly due to a lack of money, and it seems likely that the newly GOP-led Congress will nix any budget increases. Also, the push-back from market libertarians has been loud and consistent, with legions of anti-regulation lobbyists beating down politicians' doors in Washington.
The regulators appear resolute regardless. There are already proposals on the table as they prepare to define and enforce new rules under the Dodd-Frank Act. In the case of the Volcker Rule, the authorities are proposing a three tiered approach.  First "tripwires", such as the length of time a trader holds a position, its size or riskiness, would alert banks’ compliance departments who would then (#2) quiz the trader on the nature of the position. And (#3) regulators that keep inspectors on banks’ premises would see the tripwires and monitor both traders and compliance departments.
Over at the CFTC, regulators are looking at a similar approach to monitoring and controlling position limits on products such as oil and metals with a "points" system that would give the CFTC monthly reports that it could use to red-flag traders with large positions. The tracking and red flag approach is definitely moving in the right direction. Investor confidence, already at worrying lows, is in danger of becoming pandemic if nothing is done.
A TABB Group survey revealed that 63% of respondents believe that the recent insider trading probe has put a damper on investor confidence. Because the recent insider trading arrests in the U.S. have been in prominent mutual  funds and hedge funds, ordinary investors could be more wary about investing in those funds and others. TABB says that, while enforcement actions can have positive or negative influence on confidence, respondents agree the current probe is having an overwhelmingly negative impact.
Regulators have a mandate to protect investors, and the best way to do this is by using monitoring and surveillance technology to help catch insider trading, market manipulation and avoid fat fingered trading errors. Congress needs to give them the wherewithal, and naysayers need to remember that CCTVs catch criminals.
(This blog also ran on TABB Forum:

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