Central monitoring of trading on an international scale would be desirable. But is it even possible? The monitoring of the different markets is a fragmented as the markets themselves. Is central monitoring only a myth? Two experts have examined this question: Michael Zollweg and Carl-Frederik Scharffenorth from the Trading Surveillance Office of the Frankfurt Stock Exchange and Eurex Germany.

1. The myth of ‘central monitoring’ in fragmented markets
It appeared to be a spectacular case of international insider trading. A Europe-
an financial services company is aware of a bulk-sized buy order of a client in
a stock and hence acquires a proprietary position. The buy order is bought in Deutsche Börse AG
country A, the buy order on behalf of the proprietary account is executed in
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country B. The Proprietary Trading Desk sells the previously bought position
as soon as the price increased. Mergenthalerallee 61
65760 Eschborn
This cross-border case was raised at a meeting of international supervisory
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authorities and was presented by an external system provider of a so-called 60485 Frankfurt am Main
cross-market-compliant market surveillance software. An automated analysis
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of data derived from individual European trading platforms that is operated by +49-(0) 69-2 11-17854
the system of the respective software- engineer had uncovered this case.
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However, the devil is in the detail. The re-investigation of the case by a super-
visory body including an inquiry of the financial services company revealed, Internet
that the surveillance system could not reflect the correct trading process. The deutsche-boerse.com
entered data as to the alleged prior proprietary transaction while being aware E-Mail
of the client order turned out to be incorrect. In fact, the case was subject to social-media@
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two independently executed client orders.
What happened? The automated identification of the electronic order as client-
or proprietary order was incorrect. Moreover, the timely sequence of the order
entries did not match the entry time in both trading systems.
The data feed in use admittedly referred to original data of the trading systems
only in part. Nevertheless, the case shows the difficulties that were to be ex-
pected if a central market surveillance system had to be fed with trading data
of all trading systems in order to enable an overall view of trading.
A few supervisory authorities and European bodies advance the following the-
sis:
 An overall view would be lacking without a centralized surveillance of
all trading data and a market-fragmented abuse remained uncovered.
 Central trading data availability could enable the detection of new
trading conduct that points to cross-border market abuse (different ju-
risdiction/markets).
 A central database and analysis would be required in order to cope
with the increasing challenges the watch dogs are faced with, e.g. by
the increase in automated trading systems.

2. One single entity with complete oversight: This seems to be a valid argument
for an attempted solution and sounds promising at first.
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However, besides fair comments, there are also considerable economic and
legal uncertainties (area of competence, data protection, different jurisdictions Media Relations
within the EU, costs) and this raises the question whether the theoretic ad-
Mergenthalerallee 61
vantages of a centralized market surveillance justify the uncertainties of the 65760 Eschborn
technical implementation and the expected consequences to the trading plat-
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forms involved.
60485 Frankfurt am Main
Ideal market surveillance primarily requires data that is already in use for to-
day’s investigations (transactions, orders and quotes, data identifying the en- Telefon
+49-(0) 69-2 11-17854
tering trading participant/trader including individual identification numbers as
well as respective timestamp granularity as to the time of entry, deletion or Fax
+49-(0) 69-2 11-11501
change of events in the trading system). Yet a few more aspects are required
in order to ensure midterm market surveillance, i.e. the encrypted information Internet
for each order/quote concerning the originating party placing the order (human deutsche-boerse.com
being) or ‘originator’ (machine). E-Mail
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However, where are the limits of this ‘big picture’ solution? All markets em- deutsche-boerse.com
bracing all OTC-transactions? If fragmentation really jeopardized market sur-
veillance, would you allow the heretical thought that the provision of one Eu-
ropean order book is the better solution?
The technical implementation of a central market surveillance system would
all the more be reduced to the lowest common denominator as far as the con-
sistency, granularity and design of the data is concerned. The trading system
comprising the weakest basic supervisory parameters would thus steer cen-
tralized market surveillance. Central supervisory requirements for data quality
in trading systems would be an option with the consequence that the opera-
tors would be dependent on the technical and timely requirements for the
monitoring in the case of updates of their systems. A central market surveil-
lance system had to be adapted to the new requirements in the event of the
modification of each trading system. Otherwise, a central surveillance system
could not be ensured. The introduction of a new release of a trading system
must be postponed - a nightmare scenario for all operators of exchanges and
trading platforms.
Additionally a centralized solution would incur high expenses. Independent of
the huge memory capacity, complex adapters are required in order to read all
data and to reproduce the individual market models. In this process, the
fragmentation of the ‘actors’ (lacking distinctive identification of entities under
administrative and private law) is not resolved.

3. Prior to toy with the universe of all trading data the outcome of this process
should be initially scrutinized very precisely as to which result is actually en-
visaged.
‘Single oversight’ – the question is: ‘About what?’ Gaining insight depends on Deutsche Börse AG
an adequate set of questions and not the central availability of data.
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Let’s examine the thesis which criteria ‘modern’ fast trading is subject to in
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order to be centrally supervised in an adequate manner. 65760 Eschborn
The speed of trading is ‘merely’ a technical challenge for the present systems Postanschrift
60485 Frankfurt am Main
as far as monitoring is concerned. All incidents of the trading systems are also
required to be displayed and reconstructed in surveillance systems. Telefon
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Automated trading has undoubtedly changed the market. The daily volatility
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may increase on the market and the response time to price-relevant incidents
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may decline respectively. In case volatility is to be confined for regulative rea-
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sons, market models may be analysed and amended by European-wide provi-
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sions (e.g. micro-auction trading). Certainly this has nothing to do with trad-
ing surveillance, but with market structure. E-Mail
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The basic principle of trading surveillance is the coherence of cause and effect
as far as trading is concerned. In this context, the trading activities are to be
collected in a manner that the specified components (actors) are preferably
available in close intervals for the individual markets in a standardized form.
These issues are to be dealt with prior to an approach to European-wide cen-
tral surveillance:
 Development of standardized specifications (functionally/technically)
that enable typified surveillance inquiries/replies (remote, but auto-
mated cross-market surveillance).
 Mandatory electronic identification of the originating party of the order
(human being, computer, strategy) per order/quote without disclosing
individual-related data. This should apply for entities under adminis-
trative and private law (introduction of LEI).
 As far as automated trading strategies are concerned, algorithms, their
history and effect on the market are to be identifiable also in retro-
spect.
 Analysis methods that should uncover abusive trading scenarios are
subject to regulatory standardization/harmonization.

4. It’s about time that market surveillance embraces the interdependence of in-
ternational markets and products. However, to assume that new insight may
be gained on account of fragmented data (and markets) in ‘lumping everything
together’ is incorrect and economically unjustifiable. An ‘one-pot dish’ may be
waived insofar as the surveillance systems are connected in the same way as
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the market places that are subject to monitoring.
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©2012 Michael Zollweg, Carl-Frederik Scharffenorth Mergenthalerallee 61
65760 Eschborn
Postanschrift
60485 Frankfurt am Main
Telefon
+49-(0) 69-2 11-17854
Fax
+49-(0) 69-2 11-11501
Internet
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E-Mail
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