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

Following up on our article last month looking at 'b-next' and its new FX Benchmark monitoring tool aimed at detecting market manipulation, Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Read this Term 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.

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.

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.

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 Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term 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.

4. Who are your competitors?

Banks in most territories around the world rely on two competitive systems - ‘Actimize’ and ‘Smarts’. We are building our client base and creeping up on these firms by offering an extended capability across instrument types. We have invested money and launched a product to address the particular issue of FX benchmark fixing. The major instigators of FX benchmark fixing have been using competitive solutions and that’s why we have invested significant funding to extend our solutions.

5. What is b-next's level of compatibility with existing systems operating at large banks and trading venues?

Scope wise, our technology can be hosted on behalf of the client within a secure hosting environment or implemented within their own IT infrastructure. Our clients have both options so we can meet any strategic requirements within the bank.

b-next is fully integrated with FX market data. The only piece of work that is required is for the bank to present a log of their FX trades and have the will to invest further in a specialist provider to do this monitoring for them. Secondly, it’s a strategic decision to bring in another supplier of specialist surveillance activity. Most of the big banks already have multiple detection systems in place, but clearly neither of them was successful in detecting abusive market activity in recent years amidst so many different manipulation scandals to have hit the banking industry.

6. Does b-next monitor benchmark fixing only or FX trading activity throughout a trading session?

With the FX Benchmarking solution we have created a subset of our functionality to tempt large banks that aren’t already our customers to use to our solution in order to fill the gap of checking FX trading against benchmarks.

In addition to that our new offering allows banks to monitor benchmarks across the board in general. We are currently implementing a project that allows monitoring of all benchmark activity.

The key solutions offered by b-next include market abuse surveillance across all instruments traded - our unique advantage with this solution is it can monitor all asset types traded across all global markets. The other core product is Compliance and insider information and conflicts of interest. It's a mission critical system for most institutions.

7. Could b-next’s tool(s) be applied to the gold market?

We are specialists in monitoring trading activity. Gold is just another flavour of this tool. We have started on a project to actively monitor 69 benchmarks in FX, interest rate and commodity markets.

Whether it's gold or other types of benchmarks, many of them are created not from traditional trading activity but from submissions by market participants to the benchmark administrator. Trading activity is now mostly digital whereas submissions are done via notification. Our core goal is to create a system to monitor malicious activity, whether it's digital on-exchange trading, notifications to the administrator or OTC trading.

8. Is there interest for b-next products outside of the banking and institutional space?

We are seeing some interest for our solutions from buy-side investment firms and energy companies in response to our ability to detect price fixing in wholesale energy markets. The recent ESMA guidelines have encouraged many firms to tighten their compliance and monitoring procedures.

9. What sets you apart from the rest of the field?

What we are better at than anyone else is that we can do both exchange traded, listed products, notification submissions and off-exchange OTC markets in tandem

Our primary competitive advantage is our ability to monitor non-exchange OTC instruments alongside listed products. Banks have gaps in their operations regarding this aspect which b-next is capable of filling. The other advantage is that our system is integrated into one solution and works with any market globally, whereas our major competitors have multiple systems that must be implemented individually.

We use sophisticated tools to integrate global market data into our systems and it means we can probe and continuously monitor trading activity within any market in the world.