b-next's Martin Porter Discusses the Challenges of Market Abuse Detection

Forex Magnates reached out to b-next’s Director of Sales and Business Development, Martin Porter.

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Following up on our article last month looking at ‘b-next’ and its new FX Benchmark monitoring tool aimed at detecting market manipulation, Forex Magnates reached out to b-next’s Director of Sales and Business Development, Martin Porter, to get a deeper understanding of the company’s roots, future direction and Mr. Porter’s views on the financial services landscape in general.

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 1. What is b-next’s background?

I joined 3 years ago from SunGard. b-next is a reasonably small German founded company and I head up the international operations in London. The reason I joined B-Next is because the company has a robust system that works well in multiple market environments.

b-next has a very strong German client base given our roots. The company has got to where it is because in Germany they did something called ‘market conformity’ before the rest of the world ever thought of doing any kind of monitoring, surveillance or market abuse checking. We have technology that can look at any type of trading activity and carry out checks using algorithms, or what we call ‘scenarios’. The solution that b-next provides can perform surveillance and compliance checks on any instrument traded on any exchange around the world. That was a big competitive edge over the traditional players in this industry.

We have been operating for over 20 years. A large portion is in Germany but since I’ve joined we have internationalised the client base. Our two standard offerings are currently being utilised by approximately 65 companies who subscribe to either or both of our major products.

2. What are some of the challenges in monitoring trading activity?

The easy thing to do for market abuse surveillance or when trying to detect manipulative trading is to monitor exchange-traded instruments. Systems have been in place for equities and fixed income but there has always been a gap in service providers’ technology when working with OTC or off-exchange trading activity such as benchmark submissions. We have had OTC tools for years and many German firms have been looking at OTC markets for a long time. They may not have focused on FX market activity but they have been monitoring other OTC instruments which has helped to build the foundations of b-next’s technology.

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With the latest CMC: Benchmark Fixing Analysis tool, we have extended the capability and delivered it as a new solution for FX trading and FX benchmarking. We have brought this to the market as a positive provision for banks and Tier 1 firms. FX benchmark fixing has made headlines and there is a clear gap to fill.

The problem is that it is difficult to monitor FX trading with its high frequency and off-exchange nature. This creates technology and cost issues. Secondly, the major institutions in New York, London, Frankfurt and Tokyo are using legacy systems that have gaps in their surveillance technology. Market manipulation in the FX (and other) markets should have been detected in recent years but it wasn’t b-next’s technology that was being used.

Martin Porter, B-Next Director of Sales and Business Development

We launched the FX Benchmarking solution to plug the gaps in those institutions because they are not doing adequate surveillance on FX trading activity. It’s a technical challenge and to achieve that, you need a solution that can recognise FX trades and the data related to FX trades with tight integration to major data stores. FX does not have major public data sources of what’s being traded so to counteract this we established a partnership with Thomson Reuters to bring a sophisticated workable solution to the market. Now we want the banks that are being hit by incredible fines for their participation to take up the solution and put some controls in place.

3. Is b-next filling a gap in the market?

We are offering a solution to a problem that our competitors have not addressed.

What we can do for firms is monitor FX trading within the benchmarking window or throughout the day. We can detect ‘wash trading’ whereby two participants are trading with each other without changing each other’s balance sheet but pushing up (or down) the value of a currency pair or influencing liquidity in that market. We can provide monitoring for ‘cancelled trades’ whereby false bids and offers are placed and removed without the intention of being executed. Our system can also monitor for ‘pre-arranged trading’ to detect co-operation between employees at different banks.

‘Marking the fix’ or ‘marking the close’ – we can focus on activity within the 4pm fixing window and then report to the firm whether traders are more or less active during a window compared to activity in the rest of the day or compared to other observed windows. b-next can detect changes in trading activity patterns with customised oversight parameters set by the client. We alert Compliance teams to unusual behaviour that FX traders may be engaged in to manipulate that fix.

Large international banks and trading venues are using legacy systems which do not have the technology to carry out this level of monitoring. We are new to their selection criteria so we are trying to break into the interbank market. We have several banks and broker-dealers as clients but the large American and UK banks are not yet clients of ours.

We have got a technological solution for them that can carry out systematic surveillance of malicious FX trading activity.

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