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BTEX launch puts NFA's market surveillance group to the test
As part of its strategic goal to develop new business, NFA signed an agreement in June 2001 with BrokerTec Futures Exchange, LLC (BTEX) to provide regulatory programs and services to the new electronic exchange. On November 30, 2001, BTEX began trading and NFA's new Trade Practice and Market Surveillance (TP/MS) program was put to its first comprehensive real-time test.
"Extending NFA's services to a new electronic exchange such as BrokerTec fits in perfectly with NFA's comprehensive and progressive business plan," says Yvonne Downs, Senior Vice President of Compliance and head of the Trade Practice and Market Surveillance division. "If BTEX's first trading day is any indication, NFA can look forward to many more successes to come."
BTEX is an electronic exchange with whom NFA signed an agreement to provide regulatory services in June. The launch, which saw a successful 9,588 contracts traded on the first day, marks the culmination of months of planning, systems development and staff training by both BTEX and NFA.
Downs says that the successful launch of BTEX has a lot to do with the teamwork involved between the organizations in making sure the electronic exchange got off to a good start.
"It has really been a coalescing of our staff and BrokerTec's staff to work as one team," Downs says. "It's a very practical relationship: we can help them with issues that they're unfamiliar with and they can tell us what they've learned. The whole process has gone very well, and we've been very pleased."
The BrokerTec trading system is built around a trading platform designed by OM Technology. OM's dedicated high-speed network is implemented with a powerful central processing engine managing the matching process, which handles 5,000 orders per second. OM is mainly a European engine that is utilized in some cash markets and some futures markets. However, BrokerTec has tailor-made OM to perform for both markets simultaneously.
"What's unique with this trading system is that BrokerTec has set it up such that its cash market and its futures market are displayed so that you can go between them almost seamlessly," says Downs. "It gives you the ability to do spread trading between cash and futures as one transaction. This function adds efficiency, gives you more market information, and ties the markets closer together between cash and futures. Essentially, it's designed to reduce barriers of entry to the marketplace."
The surveillance software used by NFA's TP/MS group utilizes state-of-the-art technology to ensure market integrity. Its in-house development by NFA staff is another example of both NFA's technological expertise and its cost-saving measures. Currently, NFA has two full time programmers working on the system: Tim McHenry, Senior Applications Developer in the Information Systems Department, and Vince Tabor, an Information Systems Department Supervisor. Applications Developer Valerie Trax also made a significant contribution to the system.
The software is used to analyze market activity on two levels. One level is trade practice surveillance, where the TP/MS group examines the entire trade record for certain complex patterns of activity. The other level is market surveillance, where broader market trends that may indicate price manipulations are examined.
"We recognize that while systems can accomplish a lot in terms of complex pattern identification and modeling, the true knowledge still resides with the analyst," says McHenry. "Our goal is designed to help the analyst leverage this knowledge in as efficient and effective a manner as possible."
TP/MS Managers Ed Dasso and Dan Unti monitor BTEX trading activity. Dasso and Unti take data sent by BTEX at the end of each trading day and, using the surveillance software to replay the trading day from start to finish, look for suspicious patterns of activity. The system alerts Dasso and Unti if it detects any deviations.
The system provides a variety of tools to help the two analysts monitor the data. For example, the system has the ability to create in-depth profiles of individual traders so that deviations from normal trade activity can be identified for further review. It can take trade data and model it to identify things like suspicious profit/loss patterns for a particular trader. It can also create a profile of what contracts a trader trades, the accounts he trades for, who he trades with, what his average profit per trade is, and many other variables. All these tools are at the analyst's disposal to ensure that market integrity at BTEX is not compromised.
In addition to trade practice and market surveillance activities, NFA will also perform other regulatory services, including conducting background checks, investigating and litigating any disciplinary matter that may arise, performing auditing and financial surveillance functions as the CFTC requires and providing a forum to resolve disputes that may arise.
In addition, NFA will assist BTEX by providing the means of gathering information on the exact time and price for each individual trade, and will also provide BTEX with reports that will tell them what BTEX's market makers' overall market exposure is in regards to providing liquidity to BTEX.
BTEX and BrokerTec Clearing Company, its affiliated clearinghouse, received Contract Market Designation and Derivatives Clearing Organization status, respectively, from the CFTC in June 2001. Both are subsidiaries of BrokerTec Global L.L.C., a fully electronic inter-dealer broker of fixed income securities. A consortium of 14 of the world's leading financial services companies formed BrokerTec Global in 1999.