Updated: Mar 9
Unless you’ve been living under a rock, there is little chance you’ve avoided the GameStop (GME) headlines. Whether you follow Reddit, read the Financial Times, or tuned into the Senate hearing on February 18th, the news was everywhere earlier this month. Retail investors poured money into purchasing GME stock, which resulted in pushing stock prices to surge more than 700 percent in a week. At one point, prices went from $2 per share to over $300 per share—causing complete upheaval on Wall Street. The media is filled with analysis on how lawmakers are responding or how the public wants the lawmakers to respond to those involved. But what can compliance officers learn in the aftermath of the GameStop frenzy? How do compliance officers handle social investing? It can be overwhelming to try and understand how this impacts your day to day compliance strategy, but with the right surveillance strategies and tools, you can adapt on the fly to ensure you’re detecting market abuse. Compliance officers are tasked with identifying instances of misconduct before they escalate, but in order to successfully do this, it’s crucial to have policies in place to monitor for the right types of risks—on scenarios including the one we’ve witnessed with GameStop this year. More specifically, in this case, pumping and dumping stock using social channels could constitute misconduct for players in the financial sector. Additionally, are your traders contributing information or misinformation to Reddit and other channels as these stories take center stage in the media? It’s important to monitor your internal communications to identify any instances where employees within your surveillance policy are discussing this type of unethical behavior. So, the first step is to update your software policies to monitor for conversations related to pumping and dumping stocks and participating in social discourse around trading. Such policies should cover scenarios such as:
Boasting. Are people bragging to colleagues about financial wins related to trading or social media conversations?
Trading for personal accounts (PAD). Are people trading using their personal accounts to take advantage of market volatility they are privy to as a result of their role? In particular, you’ll want to detect instances of employees trading on personal accounts without approval.
Trading off certain information. Surveillance teams need to identify instances where employees use insider information to inform personal trading, or to disclose sensitive information to others. For instance, one of your employees may be aware of a particular trade platform halting trading, hedge fund influence, or institutions going bankrupt before it’s public knowledge. This information could also pertain to how trading platforms, banks, or hedge funds are going to respond to market volatility. Sharing or using it in an inappropriate manner constitutes market abuse.
To protect your organization and stay ahead of misconduct, make sure your compliance team is following market news and can quickly adapt their surveillance practices to capture inappropriate responses before they escalate. Having the right technology in place can ensure you’re adapting to emerging scenarios like this without overwhelming your team. How do compliance officers respond to this wild volatility? Events like what happened with GameStop cause an increase in market volatility, which often means surveillance teams will see an uptick in alerts. It’s important that surveillance programs can manage the volatility to ensure the surge of alerts are reviewed in a timely manner, as regulators will continue to expect firms to report any potential market abuse without delay. Now more than ever, compliance teams need to leverage advanced technology to reduce false positives and fine-tune surveillance models. Doing so will help manage any upticks in alerts and increase efficiency and effectiveness overall. As you’re using (or acquiring) this technology, be sure to look out for some key differentiators to help in times like these:
The ability to adjust existing policies or create new ones in real-time ensures your system is better at identifying risk, whatever that risk looks like, without the need to bring in a vendor to make adjustments. Making changes on the fly will help your team adapt as needed to emerging issues and trends.
Focused review will help you home in on what matters, sooner. Instead of treating every alert the same, your surveillance tool can help sort alerts by identifying the ones that the machine learning algorithm has flagged as the highest risk.
A greater speed to close will minimize the time it takes to evaluate and escalate or close an alert. Using an advanced and intuitive UI that allows you to visualize and understand the content, context, and intent of a conversation will foster faster identification of real risks.
Did you know? You can find these features and more in Relativity Trace, which automatically surfaces the riskiest content and enables your compliance team to focus on what really matters. Stock markets are interesting on a normal day, but now we have the exhilaration of watching professional investors face off with retail traders who have learnt how to gain from the stock market via social media. In fact, the GameStop story may go down in history as the most successful takeover of the stock markets since Jordan Belfort was dubbed the Wolf of Wall Street. Don’t be caught off guard next time news like this erupts. An appropriate surveillance strategy can make all the difference in protecting your firm from falling into the mayhem. Sonia Chowdhury is a compliance subject matter expert at Relativity, where she supports development of Trace—a communication surveillance tool that detects insider trading, collusion, and other non-compliant behavior in real-time.
Erika Sperekas is a product marketing specialist for Trace at Relativity.