Trading in the stock market is an integral part of every economy. Both individual investors and institutional investors put their money in different stocks. They make two types of incomes from their investments. The first type of income is the short-term gain that comes in the form of dividends. The second type of income is the capital gain that occurs when the prices of a stock increase. Investors can get capital gains by selling the shares at a price higher than the buying price of the shares.
Just like all other fields, the field of trading (i.e., investing in the stock market) is also prone to abuses, thefts, and malpractices. It’s quite simple to understand why anyone would want to abuse the market. People take advantage of the loopholes to make profits unethically.
In order to prevent such occurrences, trade surveillance is carried out. The term ‘trade surveillance’ refers to the wide gamut of activities performed to discover the incidences wherein investors and other stakeholders have followed unethical practices.
What Exactly is Trade Surveillance? What Does It Include?
Trade surveillance can be defined as a system or procedure built to track the transactions that have taken place in the stock market for identifying the incidences that involve fraud, abuse, and manipulation. After identifying the incidences, necessary actions are taken. Legal charges under appropriate law are placed on the parties involved.
With the help of surveillance, various steps can be taken to prevent traders from indulging in fraudulent and dishonest practices. Punishing the offenders leads to regaining the trust of investors in trading, stock market, and regulations.
The wide gamut of services (as mentioned earlier in this post) performed as a part of the trade surveillance operations include detailed analysis of books, bank records, and other documents. Any suspicious trading pattern noticed by the officials calls for a complete audit. Various other checks are also conducted depending on the particular situation.
Which Data is Used for Conducting Trade Surveillance?
Trade surveillance requires studying, analyzing, comparing, and interpreting data. The data used for understanding the stock market is known as ‘Tick Data’. It is the high-frequency or highest resolution data related to intraday trading. Tick data includes the data about all the trading activities – trades that were executed as well as bid/ask quotes placed.
Now, this data has to be gathered from multiple exchanges. Tick data is highly useful for analyzing the market microstructure. It is collected for all types of investments – equity shares, derivatives (futures and options), forex, cash indices, and so on.
The argument that ‘Trade Surveillance depends largely on the Data that is being used to perform it’ is made time and again by experts. This statement is completely untrue. Tick data is prone to data corruption and other flaws that can render it useless, and thereby lead to inaccurate analysis. Proper data cleaning is required before using tick data.
How is Trade Surveillance Related to the Data That Fuels It?
As tick data is granular data, inaccuracies can take place easily. Capturing every piece of data can turn out to be difficult. If you are wondering ‘Why?’, it’s worth mentioning here that data is generated every millisecond. During times when trades are carried out in a large volume, or a high number of traders stay active (on the platform of their choice), the volume of data generated increases significantly.
The last year (i.e., the year 2020), which will be remembered for ages to come due to the COVID-19 pandemic, brought the problems regarding tick data to the attention of experts. The reason attributing to this fact is that the ‘work from home’ scenario made it difficult to track suspicious activities and behaviours.
Moreover, working remotely and becoming unemployed, which became two of many outcomes of the pandemic, gave a boost to trading in shares. Employees could get time to monitor stock prices and invest. People who became unemployed tried their luck by investing the money kept as savings.
Thus, problems related to tick data began getting noticed a lot more. Now, the surveillance is carried out by using the tick data available. If the data itself is incorrect, the results of the surveillance are not going to be correct. While conducting the surveillance tasks, it’s not possible to make the data accurate or remove flaws.
Final Words
Due to the inaccuracies and incompleteness of the tick data, achieving perfect trade surveillance results is difficult. It can lead to some fraudulent activities going unnoticed, and thereby, unreported.
