May 11, 2012 - Spending on market surveillance programmes covering equities and derivatives trading across Europe will grow by at least eight per cent in 2012, increasing from EUR105 million in 2011 to EUR126 million by 2014, according to research from Tabb Group.

Increased market fragmentation has made it more difficult to pick out market manipulation across Europe's trading venues, pushing the European Securities Markets Authority (ESMA) to enact tough new market abuse rules.

Tabb analyst Rebecca Healey says many firms will find their legacy surveillance systems out-run and ultimately overwhelmed by the sheer volume and complexity of new high frequency trading algorithms and data volumes.

"The growth of correlated trading makes one-dimensional surveillance redundant. Esma guidelines call for monitoring cross-border trading in real time, not post trade," she points out. "Unfortunately, necessary controls and procedures may prove inadequate ahead of further regulation coming down the pipe."

However, a one-size-fits-all prescriptive approach to systems and controls will not suffice, says Healey. Instead, flexible, adaptable systems are needed that can "slip in amongst the cogs and join up the dots to regulators' satisfaction".

Those who invest wisely will be rewarded by the emergence of new commercial opportunities for differentiation, she believes.

"Regulations from Brussels may be the trigger, but market surveillance is now morphing into optimal operation control," says Healey. "Despite current budget constraints, firms are beginning to invest in the necessary tools, but those who don't may well be saddled with fines and a damaged reputation.".

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