November 29, 2022 | Stamford, CT — A combination of extreme volatility, a hawkish Fed and an active SEC is driving up surveillance spending by financial services firms, which is expected to hit approximately $1.8 billion this year.
Financial firms are required to monitor communications to ward off improper or illegal conduct. The majority of spending on these surveillance functions comes from banks and dealers, which have increased surveillance budgets by 20% over the past 12 months. However, spending is growing even faster on the buy side, where budgets jumped 30% year-to-year, to nearly $390 million.
Some of the increases in surveillance spending are attributed to the dramatic deterioration of market conditions this year, including the spike in market volatility and a historic collapse of asset valuations. However, budgets were growing even before the U.S. Federal Reserve started hiking interest rates in March.
“With record-keeping lapses triggering steep fines, it makes economic sense for capital markets firms to invest in technology that helps monitor communications in a more stringent manner,” says Audrey Blater, Senior Analyst for Coalition Greenwich Market Structure & Technology and author of Capital Markets Firms Ramp Up Surveillance Technology Investments.
The growing “regtech” budgets are aimed at monitoring both eComms, the electronic communications that have been a main focus of surveillance investment in recent years, and aComms—audio communications. While it is possible to monitor voice communications, technology such as natural language processing (NLP) is far from perfect and solutions offering the transcription of audio files and searchable text are still in the development phase.
Capital markets firms are also investing in storage for both data and voice analytics. Firms required to retain information well beyond the two years of history that may come standard with most third-party systems are often willing to pay for a premium service to meet that need.
Interoperability across regtech systems is a top strategic priority. Although one-stop-shopping is the Holy Grail of compliance, many firms simply cannot afford a full overhaul, and others want to employ best-of-breed solutions for specific needs. As a result, interoperability across vendor and in-house systems is a key criterion for firms investing in surveillance technology.
“Interoperability is a building block for integration,” says Brad Tingley, Research Manager for Coalition Greenwich Market Structure & Technology and co-author of the report. “Over the next few years, compliance professionals can expect to see the continued convergence of aComms, eComms and trade monitoring.”