Thanks to the latest biometric and voice recognition technologies, banks are able to adopt a 'big brother' approach on the trading floor, monitoring their traders for rogue dealings and foul play.

Surveillance of trading floors is becoming more sophisticated as regulators increase the pressure on banks to monitor what their traders are doing. Rogue traders, the fixing of Libor and the manipulation of foreign exchange rates have spurred both regulators and banks to take more notice of how traders are behaving, and the increased capabilities of technology has allowed more effective monitoring of this.

Back in November 2014, after an investigation into foreign exchange rates, a number of regulators fined six global banks a combined $4.3bn, with the largest fines – approximately $1bn apiece – going to Citigroup and JPMorgan. Traders were accused of manipulating foreign exchange rates, sharing confidential client information and triggering stop-loss orders – the point at which their clients want to sell – for their own gain. In turn, the banks were accused of having weak controls in place and poor oversight of their trading floors.

Compliance cultures

Paul Cottee, head of product development for Smarts foreign exchange and rates derivatives at stock exchange Nasdaq, says that the regulators focused on the systems and control failures at the banks – rather than principles of market conduct – which would indicate that regulators such as the UK’s Financial Conduct Authority are placing the emphasis on improving compliance cultures in banks.

Aside from the actions related to this specific scandal, there are other regulations – such as the Dodd-Frank Act and Markets in Financial Instruments Directive 2 – that are requiring banks to increase their monitoring and documentation of trades.

Cromwell Fraser, director of trading floor portfolio and business development in the financial markets compliance division at surveillance solutions firm Nice, notes that regulators around the world are pushing for a greater supervision of traders. It is a combination of this and the increasingly sophisticated technologies, he says, that has driven improvements in surveillance.

The threat of large fines means that banks around the world are stepping up their surveillance. Meanwhile, a host of technology companies are scrambling to offer the most relevant solutions in this new environment.

Talking points

Traders have long been monitored: their phone calls recorded, their movements captured on CCTV and algorithms designed to spot anomalies in their trading patterns. Even with all this data, however, it can be difficult to detect when things are amiss. Alexandra Foster, head of global strategy and business development, financial technology services, at communications firm BT, says that banks are not just looking for the proverbial 'needle in the haystack'. “You are looking for a needle in a stack of needles,” she says. 

But now, technology has grown to such a level of sophistication that it is much more adept at sifting through all of this data and flagging up potentially suspicious behaviour. For instance, traders who are fixing benchmark rates are unlikely to speak about such activities in explicit terms, but are far more likely to speak in euphemisms instead. Speech analysis of voice recordings therefore needs to analyse if certain words – such as holiday destinations – are being mentioned out of context or frequently in a certain day. These code words may only make sense in the context of certain trades, and much of the surveillance is now focusing on linking up data on trades with corresponding communications.

Nice is one of the companies that has been offering trade surveillance for a number of years. One of the company’s recently launched solutions, says Mr Fraser, provides “holistic surveillance”, combining the monitoring of trades with speech analytics of the trader's communications. It allows banks to monitor and correlate market trends, but also takes the communications and cross-references it against the trading activity, with automatic alerts for suspicious activity.

In another example of linking trading data with communications, Fonetic, a Spanish company that specialises in speech processing, is able to provide trade reconstructions allowing someone in the compliance department to specify a particular trade and for the software to identify and group all the communications – including phone calls, instant messenger messages and text messages – relating to that trade.

The solution, which has been implemented by BBVA, Santander and others, can detect suspicious conversations even when traders are speaking in euphemisms, and it also takes into account the slang and vocabulary specific to the trading floor. Phrases such as 'don’t talk about this too much' or 'this is between you and me' are automatically flagged, as are promises of coffee or champagne.

Fonetic is also able to use linguistic models to detect all the endings of a particular word. For example, in detecting the use of the word 'high', the software would also scan for the words high, higher, highest and height, and a phrase such as 'keeping it high for a few days' would also raise an alert.

Juan Manuel Soto, CEO and founder of Fonetic, explains that a unique feature of the solution is that it is able to process speech directly from the audio, without transcribing the audio into text first. “Converting audio into text is a very poor process – you may only have 50% of what is said correctly transcribed,” he says.

Sci-fi serious

It is not just what traders are saying that is now being monitored, but also their gestures. BT’s latest Netrix HiTouch, for example, a device used by traders to control and centralise their communications, now has a video feature with an in-built camera. The video conference feature allows a trader to see their counterparty on the small screen and vice-versa. This video element, explains Ms Foster, is a way to bring trust back into the market.

When it comes to large trades, the market still relies on relationships and trust, she says, and this video function means that a trader can look their counterparty “in the whites of their eyes” and, at the same time, verify who they are actually dealing with.

An extension of this solution would be to record the interaction and use it as video surveillance of an individual's behaviour, notes Ms Foster, although no banks are using the solution in this way at the moment.

Biometrics is also becoming an important means by which to monitor the trading floor. Back in 2012, for example, BT announced that it would be using Hitachi’s finger vein technology – which detects blood flow rather than just the fingerprint – so that traders could log onto their systems by scanning their fingers first. Technology such as this, says Ms Foster, shows how some of the technology previously confined to the realms of science-fiction movies is now becoming industry standard.  

Fonetic also has voice biometrics capabilities built into its solution, which Mr Soto sees as complementary to the company’s speech recognition software. The advantage of using biometrics, notes Mr Soto, is that a user can confirm that the counterparty is who they say they are. And, by analysing voiceprints, compliance teams can build a profile of a particular counterparty – even when they do not know who that person is – based on their voiceprint, and can bring up all the conversations that their traders have had with that person. The system can detect that it is the same person, explains Mr Soto, and can tell how many times the traders have spoken to them.

Big brother is watching

Mr Soto says that Fonetic’s solution is mostly focused on the analysis of the content of the conversations. At Nice, Mr Fraser says that the company has been discussing the use of biometrics with its clients, but for now its focus is on using speech analytics to review everything that is being discussed by traders and cross-referencing this with the surveillance of trading patterns.

“Most people are interested, at the moment, in understanding the information in the communications,” says Mr Fraser, adding that the use of biometrics will probably become more pervasive in the next year or so.

The ability to monitor what is happening on the trading floor is also speeding up. While regulators are pressuring banks to monitor more quickly, the speed is moving towards real-time. Mr Fraser at Nice says that, previously, the speed of surveillance was much slower, with alerts coming a couple of days or a week after the activity. Now, the alerts, he says, are intra-day and are becoming faster all the time.

This new speed and the omnipresent nature of some new surveillance systems are combining to give the effect of big brother on the trading floor, which will satisfy the regulators looking for improved compliance cultures and the banks that do not want to fall foul of them.

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