Introduction
Capital Market Solutions' Regulatory Surveillance and Monitoring System (RSMS) plays a critical role in ensuring financial institutions remain compliant with industry regulations. One area where RSMS provides invaluable oversight is in the detection of potential front-running schemes.
Front-running occurs when a broker or trader takes advantage of advanced knowledge of a pending large transaction that will affect its price. By executing trades ahead of the large order, the front-runner can capitalize on any price movement caused by the large transaction. This unethical practice gives the front-runner an unfair advantage and compromises market integrity.
The Case
Recently, a mid-size institutional firm that utilizes CMS's RSMS surveillance solution uncovered a potential front-running issue during a routine review of system alerts and exceptions. The firm has numerous trading desks executing orders across multiple asset classes for a diverse pool of institutional and individual investor clients. It reported a case of front running.In a dynamic business environment, scalability is crucial. IT services provide the flexibility to scale up or down your resources based on changing business needs. Cloud services, for instance, allow seamless expansion of storage and computational power
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Introduction
RSMS (Regulatory & Surveillance Management Solution) is a compliance monitoring and reporting platform from Capital Market Solutions. It provides automated tools to detect potential market abuse, compliance violations, and supervisory breaches across trading activities. RSMS offers out-of-the-box scenarios for regulations like the Market Access Rule, as well as the flexibility to configure custom detection rules based on an institution’s specific trading mandates, risk limits, and controls.
Breaching a Firm’s Risk Limit refers to a trading activity exceeding the pre-defined thresholds or boundaries set by a broker-dealer firm to control its risk exposure. These prudential limits cover criteria like order/trade quantities, notional values, etc. across different trading venues and client segments.
The Case
Recently, a mid-size institutional firm that utilizes CMS’s RSMS surveillance solution uncovered a potential front-running issue during a routine review of system alerts and exceptions. The firm has numerous trading desks executing orders across multiple asset classes for a diverse pool of institutional and individual investor clients. It reported a case of front running.
One day, they were conducting a routine review of RSMS-generated alerts and exceptions related to Trading Risk limits. A high-priority alert indicated a breach in the firm’s prudential trading limits for an institutional customer. The alert showed that for this account, the number of executed options contracts had exceeded the firm’s limit per trading day.
According to the FINRA Market Access rule, firms with market access or that provide market access to their customers to “appropriately control the risks associated with market access so as not to jeopardize their financial condition, that of other market participants, the integrity of trading on the securities markets and the stability of the financial system.”
How RSMS Helped
RSMS successfully detected this breach by validating orders and trades against configurable risk limits. Without this automated monitoring, the firm could have faced regulatory concerns around controlling consequent financial risks from excessive exposures or potential manipulative trading practices.
The institutional firm’s compliance analyst immediately coordinated with the trading desk. The traders confirmed the issue stemmed from the customer’s execution management system strategy. They temporarily restricted the customer’s order flow, notified them, and revised the trading strategy within prescribed risk limits. After remediation, the trading limits were restored. The compliance team also triggered a reassessment of all prevailing risk limits.
Throughout, RSMS maintained a complete audit trail, giving the firm confidence to detect and mitigate abnormal behavior proactively across the trade lifecycle.
Conclusion
Compliance leadership appreciated how seamlessly the alert escalation and resolution occurred, enabled by RSMS’ centralized surveillance capabilities.
This incident highlighted why automated rule-based market access risk monitoring is critical for brokers. Without RSMS’s Market Access Surveillance module, the firm would have not been able to detect and correct the issue of firm breaching through allowed trading risk limits, resulting in a potential inquiry from FINRA regulators.
As trading complexity increases, solutions like RSMS unifying multi-asset, cross-regional regulatory compliance functionality are valuable for capital markets institutions to maintain robust supervisory controls.
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