trader at desk
iStockphoto/gorodenkoff

The evolution of trading, including trends such as market fragmentation and the rise of high frequency algorithmic trading, continues to pose challenges for regulatory oversight, according to a new report from the International Organization of Securities Commissions (IOSCO).

The report, issued by the umbrella group of global regulators on Wednesday, details the results of a review of market surveillance — specifically, the implementation of IOSCO’s recommendations in this area, which date back to 2013.

Among other things, the review found that, while regulators have largely implemented the recommendations, some are still struggling to keep up with the tech-driven evolution of markets, and ongoing market fragmentation.

“The review shows that challenges remain for many regulators in collecting or analyzing the data needed to provide a complete picture of market activity across markets (within jurisdiction and cross-border), asset classes, and customers,” it said, noting that this signals ongoing data gaps and undetected risks.

For instance, within markets with multiple trading venues, some regulators have difficulties collecting and comparing data across these venues, the report said.

In particular, it flagged the “inability to analyze order and trade information on an integrated basis across multiple venues,” noting that this capability is “crucial for identifying market abuse.”

Additionally, the report said that: ”The inability of many regulators to map their cross-border surveillance capabilities was also identified as an issue of concern, given the risks in an increasingly globalized financial landscape.”

Underlying many of these weaknesses, some regulators lack adequate resources and funding, it noted — particularly when it comes to handling the volume of data generated by high-frequency trading.

These shortcomings risk becoming increasingly acute, given the ongoing growth in the speed and complexity of markets, the report suggested.

“The pace of technological change is not slowing, and fast-evolving technologies such as AI mean that it will be a continual challenge for [regulators] to keep pace and maintain effective surveillance over, and understanding of, market activity,” it said.

The report includes a series of recommendations for regulators to consider to help them identify, and address any weaknesses in their own market surveillance capabilities.

“In today’s borderless environment, regulators need both organizational and technical capabilities to conduct effective surveillance of their markets. Systematic and robust analysis of accessible, reliable and good quality data should remain a priority for all securities regulators,” said Jean-Paul Servais, IOSCO chair, in a release.