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What to know about trading venue management and surveillance

Photographic portrait of Robert Mara
Robert Mara

EY Americas Financial Services Risk Technology Leader

5 minute read 18 Sep 2023
Related topics
Banking and capital markets
Financial services
Global trade

Firms are facing heightened regulatory expectations.

In brief
  • Regulatory focus is increased around venue management activities.
  • There is not a consistent trading venue definition.
  • Insights into venue utilization, venue data quality and surveillance coverage are lacking.

With the proliferation of electronic and algorithmic trading, there has been a significant increase in the number of trading venues utilized by firms to trade across asset classes. Firms are facing heightened regulatory expectations (SEC and Financial Industry Regulatory Authority (FINRA)) on their broader market misconduct control environment with a keen interest in the venue management framework including onboarding, offboarding, impact assessments and associated business as usual (BAU) processes.

As part of this effort, the challenges that firms are trying to address include establishing a consistent definition of a trading venue, creating or updating fragmented or outdated Trading Venue Inventories, and demonstrating venue data quality and completeness, as well as the surveillance coverage (including effectiveness) for these venues across products, regions, lines of business (LOBs) and market misconduct risks.

How EY can help

Industry drivers

  • Heightened regulatory expectations — US and EMEA regulators expect firms to demonstrate adequate governance, market misconduct coverage across all venue trading activities, data completeness and quality, and efficacy of the trade surveillance framework.1
  • Front-office and compliance responsibilities — increased front-office ownership with a clear delineation and understanding of first line of defense (1LOD) vs. second line of defense (2LOD) roles and responsibilities for venue management and trade surveillance functions.
  • Increased risk - Firms need to establish a holistic view of trader activities to manage their market misconduct risks.
  • Sophisticated exams — Regulators are leveraging advanced data and analytical techniques for supervision and conduct exams and are seeking more granular information.

What firms are doing

  • Formalizing their trading venue inventory and the venue management governance framework that encompasses onboarding and offboarding of venues, ongoing maintenance and assessments, and integration with other frameworks such as third-party risk management
  • Reviewing existing trade surveillance capabilities including coverage, data quality and completeness, scenario efficacy, surveillance platform capabilities, and associated policies and procedures
  • Shifting ownership from second line to first line in establishing and maintaining and comprehensive view of venue management and trade surveillance frameworks
  • Shifting incrementally toward integrated surveillance and the use of advanced analytics for effective surveillance and an enriched user experience

Trading venue management industry challenges

There is increased regulatory focus around venue management activities from regulators across US, EMEA and Asia-Pacific regions and as a result, increased focus from global financial institutions. Key industry challenges that the business, 1LOD, 2LOD and technology groups should be working together to resolve are below:


The above challenges pose significant reputational, operational and regulatory risks for firms and can expose them to regulatory fines and actions:

Business 

  • Ineffective, limited or duplicative functionality across disparate platforms
  • Surveillance disruptions due to lack of data standardization
  • Increased costs associated with maintaining and managing multiple overlapping venues

Risk and regulatory 

  • Unauthorized use of venue platforms and failure to capture misconduct risk
  • Noncompliance with surveillance and/or regulatory reporting requirements

Operational 

  • Highly manual processes posing operational challenges and risks
  • Data quality issues or delays in intaking information

Technology 

  • Limitations of the traditional technology tools to support business growth and innovation
  • Large volumes of data and shift toward analytics stressing the current technology stack

High-level venue management framework 

  • Venue onboarding – this includes venue identification, setup and connectivity, impact analysis and change management.
  • Venue offboarding – this includes performing an impact analysis and inventory management.
  • Ongoing maintenance and assessments – this includes controls, reconciliations, updates to the venue inventory, venue change management, data quality assessment, coverage assessments, surveillance inventory and reporting.

What firms should be doing

In not taking action to refresh existing or establish new venue management processes, firms expose themselves to increased risk and regulatory actions. Firms should be evaluating and enhancing their existing venue management frameworks and associated compliance programs to stay ahead of regulatory expectations. 

Trading venue management framework 

  • Establish an appropriate governance structure for a fully surveilled and comprehensive venue management program.
  • Establish a standardized trading venue definition and define the venue onboarding requirements and processes.
  • Review the venue landscape to help ensure all venues are accounted for and tabulated within the Trading Venue Inventory.

Inventory and surveillance assessments 

  • Perform gap assessments for the Trading Venue Inventory and the trade and order flow into surveillance.
  • Perform a surveillance coverage assessment across venues, products, regions, risks and market misconduct behaviors to identify surveillance coverage gaps and the subsequent downstream impacts.

Trading venue management, surveillance remediation and enhancement 

  • Develop a business and technology remediation plan based on the coverage gaps identified. 
  • Identify processes that need to be enhanced to strengthen the venue management program.
  • Define the business and technology requirements for the surveillance typologies.
  • Design, architect, and implement data and technology changes.
  • Assess technology capabilities and advise on improvements to related procedures and systems.

BAU sustainability 

  • Continuous process management through proper governance and controls and well designed and documented venue management processes and controls. 
  • Identify opportunities to leverage technology to create automated strategic technology applications used for trading venue inventory management, trade and order data capture, analysis with data quality dashboards and periodic review of surveillance coverage.
  • Stand up a robust program management framework with adequate senior management reporting.
Danielle Austin, Allen Morrison, Preston Thompson also contributed to the article.

Summary 

Firms need to examine and improve their existing venue management frameworks and associated compliance programs by renewing or developing new processes to lessen risk and stay ahead of regulatory expectations.

About this article

Photographic portrait of Robert Mara
Robert Mara
EY Americas Financial Services Risk Technology Leader
Risk technology leader in financial services. Navigating rapidly changing risk/compliance, tech, and business complexities. Doesn’t always see the box out of which to think.
Related topics
Banking and capital markets
Financial services
Global trade

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