Doubtlessly, most of us have heard someone utter, “it’s the thought that counts” several (hundred) times during our lifespans. It’s a platitude that holds true in so many different contexts. The “thought” behind a gift is usually at least as important as the gift itself. A misspoken message is more easily forgiven when considering the intent or “thought” behind it, and intent is frequently cited as a mitigating factor in legal matters both civil and criminal.
The thoughts that account for our actions can play a major role in financial crime cases. While sometimes the facts speak for themselves, the ability to determine a market participant’s intentions can heavily factor into the outcome of regulatory investigations. Indeed, firms subject to MiFID II have been advised by the European Securities & Markets Authority (ESMA) that they must be able “to show the intention behind trading and the knowledge of the person at the point at which they trade.”* This concept may sound simple, but of course the implementation is a bit more complicated. ESMA acknowledges that a trader’s intent and knowledge “are matters that are often not easily established, but may be crucial in a successful enforcement case”.
Despite the regulatory focus on intent, one of the most important aspects of surveillance infrastructure, communications surveillance, is also usually the area with the most rudimentary coverage in many firms. While sophisticated trade data analyses can reveal and even predict financial crimes, insight into the employee’s intent—the thought driving illegal or unethical behavior—can only be derived from communications surveillance. The content of messages exchanged between market participants can provide key insights that aide in early detection of problematic behavior, allowing the firm to deal with issues before they draw regulatory ire. Given the scale and complexity of communications data, the true challenge is wading through the “noise” to reliably and accurately identify the messages that matter.
New and increasingly advanced means of analyzing human communication are providing this precision. Natural language processing or, in its more evolved guise, natural language understanding, is one such solution that is key to effective communications surveillance coverage. While many—in fact, the majority of—financial firms are still using lexicon-based approaches in their communications surveillance ecosystem, natural language analysis is indeed available in the regtech realm. As such, it is a capability that carries little excuse not to be deployed. Utilizing technology that can not only understand the intricacies of human (specifically, trader) language, but can also generate alerts based on intent commingled with flags from other aspects of the trade life cycle, would be a vast improvement to the average firm’s communications surveillance infrastructure.
Several infamous incidents, which likely could have been avoided had such functionality been in place, come to mind. Many forms of market manipulation necessitate some sort of collusion; the signs of crimes like insider trading, for example, are frequently present in electronic and voice communications. Leveraging advanced language analytics is integral to a firm’s defenses. Utilizing this technology can help protect employees from slippery-slope consequences of seemingly minor infractions. Would SAC Capital still exist today if language analytics had been an available component in the compliance infrastructure of the firm? Would Henry Blodget still be a top equity analyst at Oppenheimer had some of his early questionable interactions been detected and corrected? Integrating communication and trading analytics would have helped both firms detect and deal with these issues before they reached the point at which salvation was impossible.
The importance of determining intent is not limited to preventative action; it is a key part of trade reconstruction as well—especially in the MiFID II world, in which the early part of the trade life cycle is now a required inclusion. Mapping out intent could also be a potential defense in the (admittedly rare) cases of coincidental collusion. Firms are required to keep logs of all relevant communications records in various states of storage for up to seven years (longer in certain circumstances). In the case of an inquiry, employing natural-language analytics in the compliance toolkit could assist a firm exponentially in tracking the relevant communications. This is not to say that such technology is a single cure-all to deal with communications compliance—there are still several components that need to work in tandem to achieve the best efficacy. However, having the capability to rely on effective technology assistance to make sense of the nearly infinite number of missives and recordings, and establish the “thought” behind certain actions and behaviors, would certainly be a large step in the right direction.
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