At least one market segment isn’t complaining about regulation -- software vendors. Providers of compliance applications are happy to see increased pressure from exchanges and regulatory authorities because it helps them increase sales. And while many technology acquisitions for trading or customer management systems can be postponed indefinitely, regulators often set deadlines.
“The regulatory landscape is changing dramatically in the U.S. and Europe,’ said Paul McKeown, vice president for market technology and NASDAQ OMX. “The focus on regulation is becoming intense and has increased dramatically over the last two to three years. The exchanges and broker dealers are allocating added budget to these areas. We are seeing an uptick in broker dealers coming to us. Clearly we need to be competitive, but our business continues to grow.”
The Financial Services Authority (FSA) in England is the latest customer to chose NASDAQ OMX SMARTS technology for market surveillance.
“At the regulatory and exchange level, SMARTS provides extremely sophisticated technology to identify potentially abused trading behavior,” said McKeown. The system can identify front running, insider trading and other illegal behaviors, he added.
NASDAQ OMX sells the technology to exchanges, regulators and broker dealers who deploy it within their compliance departments. McKeown said that 50 broker dealers are customers of SMARTS with 330 individual subscriptions around the world.
In countries where the firms and the regulators or exchanges are using SMARTS, reporting is simplified, he said. Regulators are using it in Australia, Singapore, Hong Kong, Canada and now the UK, he said. While regulators who adopt SMARTS themselves don’t mandate its use by brokers, financial firms in those jurisdictions have turned to NASDAQ OMX for more information.
“In the UK, a number of brokers contacted us and said it the FSA is using SMARTS then it makes sense for us to use it.” One advantage of being on the same system as the regulator comes during investigations when the regulator knows the system and how to drill down for information.
“The discussions are much more streamlined. If you are using a different system at the broker dealer, you don’t speak a common language with the regulator.”
Because NASDAQ OMX offers SMARTS in Software as a Service (SaaS), it can be implemented relatively quickly. A firm can add a new market, like futures, and be up and running with the compliance on SMARTS within a few weeks.
Like the NYSE which has established NYSE Technologies to market its software, NASDAQ OMX has stepped up its technology sales. In 2011 technology accounted for $813 million, or 11 percent of the group’s total revenues, McKeown said. It acquired SMARTS in 2010 from Australia and is looking for other acquisitions for the market technology group. McKeown said the technology group is expanding rapidly with annual growth of 14 percent globally and ranging from 41 percent in Asia Pacific to 24 percent in the Americas and 15 percent in Europe. SMARTS is often replacing older systems both from vendors and compliance systems that were developed in-house.
“We see a shift to buying rather than building compliance systems especially as regulatory pressure increases because firms don’t have time to build.” He agrees with comments from other technology firms, such as IBM, that the business side is demanding more from IT in financial firms.
“Where firms have regulatory pressures and deadlines then clearly they have no choice. That have to be compliant and they can’t wait for an in-house development which may or may not do the job. The risk is too high.” Buying decisions for SMARTS are typically made by the compliance group although it may roll up to the risk manager.
