![Sample our Social Sciences journals, sign in here to start your FREE access for 14 days]({"type":"image" , "src" : "/sda/110822/TOC-Subject-Sample-2021-Social-Sciences.jpg"})
Abstract
With the emergence of increasingly digitized and electronically mediated financial markets has come a host of new technologies that seek to convert this new-found transparency into opportunities for financial monitoring and oversight. Adopting the term ‘financial surveillance’ as a descriptor for these emergent regulatory technologies, this article first develops this concept and then provides an in-depth analysis of one specific form of financial surveillance: the real-time monitoring of financial markets for breaches of trading rules through the use of sophisticated mathematical algorithms and computerized assessment tools. Based on interviews with the members of one agency, Market Regulation Services Inc., that performs this service on behalf of a number of individual marketplaces, the article examines the possibilities and limits of this surveillance technology as a mode of financial governance, and probes its larger significance as a regulatory device engaged in a particular performance of the markets.
Acknowledgements
This study was funded by a three-year grant from the Social Sciences and Humanities Research Council (SSHRC). My thanks to the anonymous reviewers for their insightful comments and valuable feedback.
Notes
1. These interviews are drawn from a larger study of securities regulation in Canada, the mandate of which was to examine the relative contributions of public, quasi-public and private agencies to the regulation of Canadian financial markets. Out of a total of ninety interviews, twenty are directly relevant to RS and include current and former members (eight) as well as lawyers and other stakeholders with experience dealing with the agency (twelve). The interviews were conducted between August 2006 and October 2007 and ranged from one to two hours in duration. All twenty interviews were digitally recorded and subsequently transcribed and analysed for key themes. The interviews were also supplemented by an on-site visit and tour of the surveillance facility on 31 October 2007. Page numbers for quotes refer to the original interview transcripts.
2. These attributes have been gleaned from various seminal works in the surveillance literature (e.g. Haggerty & Ericson, Citation2006; Lyon, Citation2001, Citation2007; Monahan, Citation2006).
3. One possible exception to this is forensic auditing programs which are used to review large volumes of accounting data in order to root out anomalies and signs of malfeasance. However, even here the ‘surveillance’ function is far from systematic, lacks a real-time component and is typically undertaken only after suspicions have been raised through other means.
4. While this is often referred to as ‘market surveillance’, the term ‘financial surveillance’ is more precise and helps to differentiate the surveillance of financial markets from other forms of monitoring often articulated under the moniker of ‘market surveillance’, such as the post-release tracking of consumer products for adverse health effects.
5. On 1 June 2008, after six years in existence, RS officially merged with another self-regulatory organization – the Investment Dealers Association (IDA) – to form the Investment Industry Regulatory Organization of Canada (IIROC), a reflection of the global trend towards SRO consolidation. However, given that the IDA lacked its own surveillance function, this merger has left the surveillance unit of RS largely intact as it has simply been imported into the new agency whole cloth. As a result, the conclusions yielded by this research are entirely generalizable to the new entity. Moreover, with the merger transpiring after the conclusion of this research, all references in the balance of this paper are to the agency in its original form.
6. According to a recent estimate, RS monitors roughly 220 million shares per day and oversees more than 110,000 individual trades.
7. Specific examples of this include: (1) wash trading in which there is trading between two accounts without a change in beneficial ownership; (2) pre-arranged trading whereby two parties trade based on an agreement that the transaction will be reversed later; and (3) spoofing or ‘painting the tape’ in which a trader engages in a series of buy/sell orders in order to give the impression of activity or price movement in a given stock.
8. There are various forms of insider trading. The one that falls most directly into the jurisdiction of RS is termed ‘front running’ in which a trader, upon receiving a significant client order for the purchase or sale of a stock, trades based upon that information ahead of the client – thus benefiting from the subsequent swing in the stock price and leaving the client with a lower or higher purchase price. This reflects the inherent conflicts of interest in the brokerage industry as traders are responsible for both the execution of client orders and proprietary trading through their own accounts.
9. In Canada, unlike most other jurisdictions, securities regulation is organized provincially through thirteen different securities commissions rather than a single national regulator. RS derives its authority from individual recognition agreements with a number of these commissions including British Columbia, Alberta, Manitoba, Ontario and Quebec.
10. This is largely a reflection of the high rate of staff turnover at RS, a product of the premium placed on regulatory expertise by the investment industry and the susceptibility of surveillance staff to poaching from brokerage firms hunting for experienced regulatory insiders.
11. In a recent submission to a commission of inquiry on Canada's financial markets, senior RS staff admitted that: ‘The majority of alerts relate to comparatively minor issues … While we need to continue to be vigilant in these areas, the large volume of these alerts requires surveillance officers to spend the majority of their time on them. This leaves little time to analyze and detect more complex manipulations that pose a much more serious threat to investors and market integrity’ (Market Regulation Services, Citation2003, p. 17).
12. Interestingly, RS is able to conduct inquiries into possible instances of insider trading – by contacting issuers and making inquiries concerning the disclosure or non-disclosure of material information – only by virtue of the fact that responsibility for enforcing timely disclosure rules has been delegated to RS by the Toronto Stock Exchange. This is another rather tenuous jurisdictional link, one that may be eliminated altogether given the TSX's pursuit of cost-savings and its expressed desire to re-assume responsibility for continuous disclosure.
13. Following from the well-worn practice of arbitrage, an investment strategy in which traders exploit small discrepancies in the pricing of equities, currencies and other financial instruments across different exchanges, regulatory arbitrage refers to the ability of market participants to take advantage of gaps between different regulatory regimes.
14. The influence of the investment industry is difficult to ignore given that RS, up until its merger with the IDA, was 50 per cent owned by the TSX, the very exchange it was mandated to regulate. ‘The ownership is a sore point I think for a lot of people when they look at the regulator that is 50% owned by the biggest exchange. But that's the way it was established and that's the way it's been operating’ (Former RS 1, p. 1). While the TSX has since relinquished its ownership stake, RS (now IIROC) continues to be funded through user fees and industry representatives remain in key positions on its board of directors.
15. It is widely recognized that traders adjust their activities and trading strategies in light of the detection rules and surveillance capabilities of RS. In this respect, the surveillance system is itself constitutive of market practices as some forms of questionable and potentially harmful trading are invariably perpetuated by virtue of their exclusion from the system.
16. Trading by hedge funds clearly fits the bill here as many large hedge funds have close working relationships with investment banks that provide non-public information in exchange for lucrative trading commissions, with the ensuing trades concealed through the use of offshore accounts and foreign brokers. Another form of more surreptitious yet extremely profitable trading involves company insiders who, rather than trading through their own accounts, feed privileged or confidential information to independent traders thus benefiting indirectly from subsequent movement in the stock primarily through more valuable stock options.
17. One of the key opportunities for insider trading – executing trades through the Montreal derivatives exchange – is made possible by the separation of equities (Toronto) and derivates (Montreal) markets, a distinction that has its roots in provincial politics rather than financial engineering.
18. This characterization follows, admittedly in very broad strokes, the basic contours of both the Foucauldian-inspired governmentality tradition (e.g. Dean, Citation1999; Miller & Rose, Citation2008; Rose, Citation1999) and literature on the sociology of surveillance (e.g. Haggerty & Ericson, Citation2006; Lyon, Citation2001, Citation2007).
19. The metaphor of vision and sight as a mode of knowledgeability and constituent of power is a common philosophical trope (Jay, Citation1993; Levin, Citation1997), one that directly informs the work of Foucault as well as contemporary writings in the governmentality vein.
20. Inspired by the solar eclipse, the penumbra refers to the partly shaded region of the shadow cast by an opaque object when illuminated by a light source. Extending beyond the absolute darkness immediately behind the object, the penumbra extends outward as a region of partial shadow bordering the area of illumination. This metaphor has been used in the socio-legal and regulatory literature to denote the ambiguity and indeterminacy of legal rules (see McCahery & Picciotto, Citation1995; Picciotto, Citation2007).