Santa’s Birds and Market Surveillance

A few weeks ago my wife introduced me to a new concept: Santa’s birds. The idea is based on a book of a similar title, and having mentioned it to some friends I discovered there’s a more established alternative known as the ‘Elf on the shelf.’ Both stories are modern day adaptations of the Santa Claus narrative. They propose that, given the growing scale of his operations, Santa has outsourced upkeep of the ‘nice’ and ‘naughty’ lists to an offshore network of agents (birds or elves depending on your book of choice).

For someone charged with maintaining fair and orderly behaviour in the home, the story is inspired. In our household we have two kids – aged four and two – who, for the most part, are very well behaved. But tantrums still happen, and when they do, we can now escalate up the chain of command. By threatening to tell Santa’s birds, who in turn would inform Santa himself (putting this year’s hoard of Christmas presents in jeopardy) we can stop most tantrums in their tracks. On occasion, we’ve even reached the optimal scenario where we don’t have to mention the birds – our kids remind each other (I believe that’s what they call self-regulatory status).

The dynamic of this mock surveillance got me thinking; Perhaps the same thing is going on in market surveillance. In the aftermath of the financial crisis, regulatory reporting requirements have been tightened universally. From Dodd Frank in the US, through Emir and the upcoming MiFID II/ MiFIR in Europe, to the various rule changes across APAC, regulatory agents (swap data repositories and trade repositories – akin to Santa’s birds and elves) are collecting more and more data on their subjects’ behaviour.

Whether all of this data can actually be used to find naughty traders and investors is another matter. Regulators in both the US and Europe have complained of poor data quality for some time. Even if quality issues were resolved, the idea that regulators have the technical expertise (or IT budgets) to accurately sequence and correlate events in order to detect market abuse (or the build-up of systemic risk) may be no closer to reality than Santa and his birds.

Perhaps that is for the best. Imagine if a data repository existed that contained accurate records of everyone’s trades and positions. Imagine there were tools that could effortlessly analyse all of that data, understand the nuance of every strategy and model evolving risks. Now imagine if those omniscient capabilities fell into the wrong hands. Something built to protect the integrity of the market could prove its greatest vulnerability.

For now, the knowledge that reporting requirements are being tightened should be enough to encourage self-regulation, which ought to be the ultimate goal.

Wishing all a very merry Christmas (or season’s greetings), and lots of health, happiness and prosperity for 2016!