UK financial watchdog carries some serious bite

The UK financial watchdog has a secret weapon in its battle to keep markets clean. His name is Patrick Spens.

Lord Spens set up Citigroup’s algorithmic trading unit and later joined a hedge fund. Then, during the financial crisis, he had an epiphany, he says. This prompted him to join the Financial Conduct Authority.

Since joining the regulator, he has made big changes to the market monitoring team, filling the 70-strong group he oversees with former spies and PhD-armed quantitative analysts (or “quants”). The work of this idiosyncratic team revolves around Zen, an enormous database that traces what is going on in any particular market at any particular moment.

Zen is a hungry beast, and needs regular feeding with raw data from the front line: the financial companies that the FCA regulates. A key element of Lord Spens’ strategy is to educate companies about the need for impeccable transaction reporting.

They must report each standard deal every day to the FCA, and also any that raise red flags — by way of “suspicious transaction reports”. Part of that education has included fining 12 firms £33 million (Dh189 million) over the past few years for poor transaction reporting, most recently the £13.3 million levied on Bank of America Merrill Lynch in April.

“I notice some rhetoric from firms saying it’s a pain and that it’s getting more complicated,” Lord Spens says. “But frankly, it’s cheaper for them to just build the machine than get fined.”

He is hiring more quants, and their algorithms are becoming more sophisticated, allowing his team to improve their analysis of the data provided by each business.

The message does seem to have been understood: six years ago, the FCA received reports of six million transactions a day; it now receives 18 million.

The amount of transactions that companies will have to report and his team will have to analyse is set to soar over the next two years, with the introduction of EU rules known as Mifid II, and also UK legislation implementing the recent Fair and Effective Markets Review, which will bring spot foreign exchange deals into the market abuse regime for the first time.

Lord Spens is hoping the extra burden will allow him to boost his team, who write algorithms that spot patterns and potential market abuse.

Those algorithms include one that looks at submissions to the process for setting the Libor interest rate benchmark and possible collusion.

Another is called Neighbourhood Watch. If it spots a suspicious trade, it performs a search on every single time that person traded and whether someone else dealt at the same time.

That particular algorithm has secured at least one criminal prosecution for insider dealing. Other FCA cases in which the team’s skills have been used include the banning and fining of a senior Credit Suisse bond trader last year over alleged manipulation of gilts during the UK’s quantitative easing programme, and a 26 million pound fine on Barclays for alleged rigging of the gold price.

Lord Spens also has his mind focused on potential future areas of wrongdoing.

One is the point where cyber attacks and market abuse might meet — hackers could access financial results on a listed company’s website before publication and trade on them. Building a traditional insider trading case would be almost impossible in such a scenario.

While innovations such as high-frequency trading do not cause the FCA undue concern, more longstanding parts of the market could provide fertile ground.

“Typically, the market has been good at reporting equities transactions and not so good in other asset classes. I’m expecting a rise in fixed-income [suspicious transaction reports],” he adds. “I don’t mind saying that I have a couple of cases in enforcement now for non-submission of STRs.”

— Financial Times