International Cooperation Amongst Market Operators does Exist
Much has been said of the need for greater cross-market cooperation between regulators in light of recent events. Whilst this is not a new issue, it has been given greater focus since the financial crisis that led to a number of governments around the world providing financial support to key institutions. Furthermore with debate raging in both the US and Europe over the extent to which markets, and market participants should be regulated, it would seem that we are once again about to enter a period of considerable change in how financial markets operate. It is against this backdrop that it is perhaps not so well known that for nearly 30 years now there has been an organisation in existence which actively promotes cross-market cooperation amongst its members, shares information on specific trading activity and experiences in how the surveillance of markets (and market participants) is actually undertaken. That organisation is the Intermarket Surveillance Group (“ISG”).
The ISG was established in the early 1980s by a number of US Self-Regulatory Organisations (“SROs”) in response to a need to share information relating to the market surveillance activities which each SRO undertook. As trading activity increased and hence the need to share information, so the ISG became the primary means by which such information was passed between US SROs. This resulted in the US Securities and Exchange Commission (“SEC”) determining that membership of the ISG enabled US SROs to meet certain of their obligations as set out in relevant US legislation, and from that time onwards all US SROs are obliged to become members of the ISG. Because membership of the ISG serves this dual purpose, so those institutions which seek to become members must be able to demonstrate to the satisfaction of the ISG Executive that they are indeed able to obtain and share relevant information. The strength of the organisation rests to a very large extent upon this principle and consequently there have been applicants who have been denied membership until such time as they have either changed their own rules or, in certain cases, where the relevant law(s) in their own jurisdictions have been amended.
Although the original membership of the ISG was based upon US SROs it was soon noticeable that there were instances where cross-market exchange of information was required in order to undertake comprehensive market surveillance, and that this cross-market activity was not limited to US equity markets. It was therefore decided to admit non-US SROs – principally US Futures Markets – and non-US institutions to the ISG. In doing so the core objective was to ensure that only those institutions that perform front-line market surveillance in their respective jurisdictions be admitted as members, and that those attending the ISG meetings should be those tasked with actually performing market surveillance activities – i.e. those individuals that would bring direct personal experience of the issues with which they were confronted with on a daily basis.
As a result the membership of ISG grew significantly over the years and now numbers some 47 institutions. As one would expect given the growth in global markets so the membership of ISG has reflected the increasing cross-market nature of trading, such that there are now more non-US members than US, with representatives from Asia, Australia, Europe, India and North America. There continues to be growing interest from other organisations in becoming members of ISG and as more and more countries seek to develop their own financial infrastructure this is a trend that is unlikely to abate for some time to come.
One consequence of the growth in membership was a comprehensive revision of the ISG Agreement, moving it away from a US-centred organisation to one that was much more in keeping with the geographical breakdown of the membership itself. Indeed, it could be said that ISG now stood for “International Surveillance Group”, such is the diversity of the membership.
There are two main goals of the ISG: 1) the coordination and development of programmes and procedures to identify possible fraudulent and manipulative activities across markets; and 2) information sharing between members. The growth in global trading has seen an increase in fraudulent and manipulative activities, although the types of activities are broadly the same regardless of the market upon which such activity occurs. The spread of common types of abusive activities makes it all the more important that those institutions who have the responsibility for monitoring for this activity have the ability to share not only information relating to specific incidents, but also their experience generally in the handling of these activities.
This is where the ISG is able to show its effectiveness for, as noted earlier, the Agreement governing membership of the organisation specifically requires members to be able to obtain and share information relating to particular market activity upon request, and this is an ongoing obligation. These requests are typically driven from alerts raised on one ISG member’s market and which has some form of cross-market element to it – e.g. activity in a product that is dual-listed on another market. The request can cover not only the trading activity that has taken place on the other market, but on whose behalf the activity was undertaken together with such other regulatory information and documentation as may be deemed helpful to the investigation. Furthermore, the opportunity exists for one or more ISG members to be party to coordinated investigations which cross multiple markets/jurisdictions.
Whilst the sharing of information typically gains the most prominence, featuring as it does in the associated investigation and, if relevant, referral to the appropriate enforcement authority, of perhaps greater significance is the sharing of common experiences in the handling of abusive activity. In recent years this has been achieved through workshop sessions at the ISG meetings, each dedicated to a particular topic with presentations given by a number of ISG members. Recent topics have included: “When Algos Go Bad”, “Layering and Spoofing”, “Insider Dealing”, and “Front Running”. Given the geographic spread of ISG members, these presentations are extremely helpful both in showing that there are common themes across the world in terms of abusive activity, and that the solutions proposed by front-line market surveillance practitioners are broadly similar. This similarity in approach provides a useful benchmark of ISG members in terms of their own surveillance approach as well as a common understanding of the issues involved when seeking to tackle particular types of abusive activity. Furthermore, surveys of ISG members can cover a wide variety of topics, including “DMA Access”, “Trade Invalidation”, “Membership Criteria”, together with detailed questions relating to how specific market abuses are monitored and detected. It should be noted that whilst there is fierce commercial competition between ISG members, when it comes to market surveillance activities it is recognised that this is not a competitive arena but one where a common approach and understanding is best for the markets and all who trade on them. Indeed, one of the successes of the ISG is that its members can and do work closely together in dealing with potentially abusive market behaviour, notwithstanding the fact that the members are also competitors with each other.
In addition to the sharing of information and experiences in the area of abusive activity, the ISG is also heavily engaged in meeting the technology requirements of the US SEC in terms of consolidated equity options audit trail data. Following the announcement of similar requirements for cash equity products so considerable work will fall to the ISG to coordinate the approach and implementation of any new requirements.
Currently the ISG meets just twice a year, with significant work undertaken by various sub-groups throughout the year. The current list of sub-groups includes: 1) membership; 2) US; 3) non-US; 4) derivatives; 5) technology; and 6) surveillance practices. Membership of each sub-group is open to all members, with the exception of the US sub-group, which is only open to US members discussing, as it does, primarily those matters that involve either the US SEC or CFTC. Whilst the non-US sub-group draws together information from around the world in terms of market developments as well as recent trends in abusive activity, it is open to all ISG members to attend. The technology sub-group was responsible for the implementation of the ISG website which, for the first time, gave a public face to the organisation as well as providing a secure mechanism for the provision of material between members.
With no secretariat or permanent staff all the work of the ISG is undertaken by ISG members on effectively a pro bono basis, and the success of the group is determined by the significant amount of effort that is put into the workshops and panel discussions by the members themselves. Although the intention is to involve as many ISG members as possible in the activities which are undertaken it is perhaps inevitable that the larger markets represented within ISG also provide a greater share of the material and case histories that are the subject of discussion.
The costs involved in being a member of ISG are limited to covering the ongoing technical support costs, funding any new technical developments and offsetting the cost of the meetings. US members incur greater technology costs given the requirements by US regulators for the automated routine sharing of information, and hence the annual cost for them is between $10-15,000 per member (not including other, volume-related technology costs). This compares with approximately $3-5,000 per Non-US member.
The ISG is also happy to invite observers to its meetings and these have included potential applicants for membership, representatives from regulators, and for a number of years now, the WFE. The ISG would like record its gratitude for the support shown to the ISG by the WFE. In addition to observers, the ISG has had representatives from research organisations and technology companies come to address their meetings to talk about activities in the field of market surveillance.
Although the ISG has a highly diverse geographical membership, the challenge is to seek representation from those areas of the globe not currently represented, particularly South America and Africa, and those where current representation is limited – e.g. Asia. The further expansion of the ISG will be beneficial to all members as there will be more markets with which it will be possible to share information on specific market activity, and for greater sharing of practical experiences amongst the members.
As market places continue to experience fragmentation of what were once seen as dominant markets, and as noted above, more countries seek to develop their own financial sectors, so the need to obtain and share relevant information cross-markets will continue to grow. Therefore, whilst the regulatory challenges presented by the changing nature of the markets themselves seem to grow ever larger and more complex, a corresponding increase in the level of international cooperation between market surveillance practitioners through the ISG provides comfort that there is at least one organisation committed to improving and enhancing market surveillance practices across the globe.
Entities interested in becoming an ISG member should contact Joakim Stridhttp://www.isgportal.org (email: Joakim.Strid@omxgroup.com), the Chairman of the Membership Subgroup, for further information, or alternatively visit the ISG website:
About Andrew Dodsworth
Andrew Dodsworth is the current Chairman of the ISG, and is the Executive Director, Market Services at NYSE Liffe. Andrew Dodsworth has worked at NYSE Liffe for nearly 15 years in a variety of operational/regulatory roles, and prior to this worked at number of international banks.