Protect Your Trade Desk – Risk and Regulatory Compliance

By Bob Mooney, Jeff Gearhart and Frank Childress

Trade desk compliance

Financial services regulators demand strong governance and supervision of broker-dealer sales and trading activity, including access to markets, electronic trading and client transactions. In this episode of the Oyster Stew podcast, Oyster’s trade desk experts share their first-hand experience in trade desk risk management, electronic trading and compliance regulations.

Having modern, configurable compliance software in place to monitor your trade activity is a vital step for any trade desk. Oyster Solutions compliance software has the supervision functionality and automation you need.


Transcript provided by TEMI

Libby Hall:

Hi, and welcome to the Oyster Stew Podcast. I’m Libby Hall, Director of Communications for Oyster Consulting. Regulators demand strong governance and supervision of sales and trading activities, including access to markets, electronic trading, and client transactions. In today’s podcast, Oyster’s trade desk experts share their firsthand experience in trade desk risk management, operations, and compliance oversight. Let’s get started.

Bob Mooney:

Today we’ll continue our discussion on what makes a successful trading desk, but with a focus on regulatory compliance. So both of you have touched on the importance of regulatory compliance and risk management in your discussion, and with the ever-increasing regulatory expectations, as well as the potential for significant losses on the desk, can you expand on the topics that should be covered in a trading desk risk management program?

Frank Childress:

Sure. So I’ll kick that one off, Bob.  I think there’s a lot of elements to that. And it’s really critically important as we’ve seen increases in both the number of fines and the scope and magnitude within the regulatory landscape, and it’s becoming increasingly more complex. So a lot of things are thrown at managers.  So certainly we talked about your culture.  So it comes from the top down that you have to have a culture of risk management, and then there’s a lot of regulatory controls and things that you need to have in place. Again, that can be managed through third party systems or in-house built systems. Some of the things that are critically important in today’s world are market access controls. You  have to understand how you’re interacting with exchanges and any type of ATS that you might be interacting with as well as the rest of the streets.

So you have to have controls on your clients and your desk and any introducing firms that you might be trading on behalf of. It’s important to have sound systems in place, as well as redundant and backup systems. You need to make sure that you’re, and I think Jeff alluded to this before, appropriately allocating your capital with tight risk controls and have some sort of view if you’re a capital committing desk on the trading desk, and exactly what’s going on there. And Jeff and I have talked about this before, but just because a trader has an excessively good day and makes a ton of money, that’s not necessarily a great indication that your risk controls are in a good place if they were able to make that much money. That there might be a similar corresponding downside that might be exposed that that you need to take a look at. So I’m sure, Jeff, you can probably provide some additional thoughts.

Jeff Gearhart:

Sure. thanks, Frank. I think those are all good points from a risk management angle, but the compliance exposure is large, too.  We’re all used to best ex in order routing.  Best ex for both fixed income and equities order routing more aligned with equities, but even performance on the desk. If you’re a market maker, then you have an obligation to be there holding within a range and over a time period as required. Not doing that will draw regulatory scrutiny and can create issues. We all were talking a little bit earlier about communications and there’s no secret about the number of fines out there. So it’s not just having the tools in place, it’s using the tools and actually monitoring what’s going on and making sure that you’re following up on issues that could come up that you need to focus on. We can’t talk about trading without talking about trade reporting. We’d be very remiss there, whether it’s CAT now CAIS, and then also TRACE and MSRB. I mean, it’s the way the world transparency and the regulators are really trying to get this information out there for people to access. That means you have to hit the hurdles. I think there’s a proposal out there right now on the fixed income space to start doing Munich reporting within a minute.

Now, of course, that’ll stress a lot of smaller places, but you’re going to have to hit those guidelines, or you’re going to get dinged by the regulator and it can add up, so it becomes very relevant. And then from just following the compliance angle, if you’re in a client facing business, retail or institutional, there’s a whole set of rules. You just have to build controls around to make sure your marks are correct and make sure you’re solving client problems. And then let’s just continue the path onboarding. My goodness, you need to know who you’re trading with. We’ve all heard the stories of when you’re trading with someone you shouldn’t, and things can go wrong. So, and there’s a lot to think about when you set up the desk. It’s not just doing the trading up front.

Frank Childress:  And it may feel a little bit on not really the exciting part of trading, but a lot of this comes back to your written supervisory procedures and how well you’ve built those out. And your supervisory procedures should not be merely a check the box regurgitation of the rules it needs to apply to what you actually do within your own firm. So we’ve seen examples of both. Clearly the more tailored it is to your specific unique trading desk, the more effective those WSPs are going to be.

Jeff Gearhart:  I agree. We talked about setting up a desk and, and I still maintain setting up the desk is the easy part.  Managing it going forward it’s important to set up controls. So as things change, I’m going to call it a new product type approach, trading desks are there to make money. You need to make sure they have the guide rails around them. And when they want to expand into a new product, take new risks or do things differently, that everybody’s aware of what the rules are, what the procedures and the policies are. Most firms have annual certifications, sign offs, things of that nature. It’s certainly required on certain topics up to the CEO level, but you need to build those into your monthly or quarterly meetings, whether it’s best ex, or supervision, or something of that nature to help control those. Just like when you’re managing risk, there’s good risk and bad risk. Good risk is within the mandates that you’ve defined. Bad risk is a trader tries to hit home run. And even if it succeeds, it’s what Frank mentioned earlier, you might have made a lot of money, but you’re outside of the risk the firm is willing to take, and you cannot put the firm at risk, and you cannot put the firm’s clients at risk and the investors at risk.

Bob Mooney:  I think it’s a good point. I think we always took the approach we needed to understand a big win as well as we understood a big loss. Both of those carry unique risks that need to be understood. And so I think that’s a good point. Both of you brought up a number of interesting topics in your discussion on risk and compliance that I’d like to dive into a little bit more. But first acknowledging that the desk is a highly dynamic environment that’s heavily regulated, I would love your thoughts on having the risk and compliance partners sitting next to you on the desk. Is that something you’ve experienced in your previous roles?

Frank Childress:

Absolutely. We had compliance folks physically sitting on the trading desk in our situation, a little bit removed from the traders.  But it’s critically important that the compliance folks have a complete understanding of what the traders are doing.  The more they understand how the systems work, what the traders are looking to try and accomplish, the better they’re going to be at protecting us and providing us some guidance with respect to any new regulatory items that came down the pike.  We didn’t physically have risk people on the trading desk. We stayed closely aligned with them and would have regular communication with the risk folks. In my most recent case, we weren’t capital committing and were agency trading only.

So there wasn’t capital at risk for the equity desk; there was for the fixed income desk. But the risk people are close by in a critical part. We would have regular meetings with them to understand what the parameters are and review situations where we may have been pushing, you know, 80, 90% of parameters and reviewing things. But I absolutely would advocate for them being on the desk and being as informed and knowledgeable as they possibly can be. They’ll provide you the best support, the more they know about your business.

Jeff Gearhart:

We did the same and interestingly enough, we would use our compliance teams. They were on the floor, but we would actually strategically place them so that they could be an information barrier, if you will, between a market making desk and then another desk. Two reasons. One, it made it easier to isolate the teams. Everybody’s been on trading floor, they know how crowded it can be. But it also put a compliance person there, and so they could hear what was going on risk. We also, were a capital risk taking business and we had our risk people sitting on the outside ring, if you will, of the trading floor, so that they were close by, knowing full well that they had access to all the risk systems and things of that nature. Another relevant point though, was we had these risk folks in our trading meetings, in our trading and sales meetings, so they could understand what we were trying to do. Communication becomes key between those second levels of defense versus with the trading operations.

Bob Mooney:  And speaking of communication, recently, there have been some massive fines with respect to the lack of oversight of electronic communications including communications on the trading desk. As the two of you are working with clients today, can you share any best practices that clients are engaging in to help demonstrate effective oversight of electronic communications?

Frank Childress:  Yeah, absolutely, Bob, and this is a big deal, and I think we’re just seeing the very beginning of this with respect to the regulators attacking electronic trading just because it’s simply such a challenging thing for a firm to have fully wrapped up despite efforts to systems to monitor all the in-house communications systems that somebody and third-party systems that they may have in place. But the communication systems are rapidly exploding. There are numerous trading communication systems embedded within trading systems. So all those have to be fed into your compliance reviews. And then there’s what’s really I think caught a lot of folks is using text on personal cell phones to communicate with, in some cases, clients, in some cases, senior leaders. And that’s a difficult one to try and incorporate into your surveillance systems.

So it’s incumbent upon firms to, to just block that out, make it extremely clear to their employees that text is a prohibited method of communicating any kind of business-related communications. So that’s from a best practices standpoint, it’s got to be a constant reminder of the nature of the fines have been large, largely because they’ve come from the senior leadership.  The offenses have been from the senior leadership within the firm. And so the regulators are clearly sending a message that this is an important deal. So regular communications and reminders about text and other electronic communications. But that’s a great point, Bob.  We’re going to see more of this, and people need to be as buttoned down as possible.  Firms are going to get fined.  But they can probably control the level of their fines based on the systems that they have in place and the evidence of the things that they’re trying to do to prevent any future electronic communication.

Jeff Gearhart:  Yeah, I agree with Frank. I think a lot of the problems came because people were not taking the rules seriously when they were not being diligent. So the reminders, the constant reminders, certifications, acknowledging and writing that you understand the rules, I think are key. I don’t know that it’s preventative, but it certainly gives you some endorsement aspect. And then I would say I’ve seen some shops not permit cell phones on a trading floor.  Given the nature of people needing to stay in touch with families and obligations with children and whatnot, that’s a tough sell. But that comes down to the culture of the firm and what you want to put in place.

Bob Mooney:

Another topic you touched on was best execution. And again, there has been some recent regulatory activity in this area. Frank, I used to chair the best ex committee at your previous firm. Any thoughts on how to create and manage an effective best execution process?

Frank Childress:

Sure, Bob. And this could be an entire discussion on its own, but fundamentally, it goes down to communications and documenting things and having a good plan in place. At the core of any, depending on what your client base looks like, whether it’s retail or institutional.  Institutional world talks about transaction cost analysis and managing their best execution. Retail has other measures whether it’s fixed income or equity. But at a minimum, if you’re a smaller firm you’re looking at quarterly best ex meetings with a charter and a clear plan in place and what you’re reviewing and what you’re documenting. And if you’re a larger firm, I’d suggest that you do monthly reviews with some level of daily reviews that measure your execution quality and next day exception reports and so on.

So it’s a critically important part. It’s getting, as we just talked about with electronic communications, it’s getting a heightened level of review by regulators with increasingly large fines. So it’s an important thing that you pay attention to with your business, whether you’re clearing a related trading desk a wholesale trading desk or a retail firm, institutional firm or even just an introducing firm, you still have a, a best ex obligation to review the execution quality of your clearing broker that’s reviewing. So lots of different layers there. Important part of the business, and Chairman Gensler’s made it very clear that execution quality is top of mind for him as he reviews how he’s looking at the whole equity market structure and execution quality for the benefit of retail clients.

Bob Mooney:  So as we talk about some of the risk and compliance topics, the first thing I think of, as I step back, is the reputational damage to a firm that failures in these areas can lead to. And I think just going back over the years, some of the bigger reputational issues have that firms have suffered, have been with respect to trading desk issues. So Jeff, based on your senior previous roles in trying to manage capital markets activity, any thoughts with respect to kind of reputational risk management from a trading desk perspective?

Jeff Gearhart: Sure, from my prior perspective, our capital markets group was part of a large bank, and our role was to service the clients. The role was not to be the leading revenue driver for the firm or anything of that nature. It was incredibly important for the value of this firm or for the role of this firm to meet and exceed client expectations and not to be a risk taker. So we had to make sure we managed our activities well within that guideline and that mission of what we were trying to accomplish. So it’s really meeting client expectations, staying out of the headlines in terms of issues, risk, compliance topics, things of that nature. It all comes back down to what we talked about at the beginning. What is the strategy of your desk and how do you manage it and how do you execute it?

Bob Mooney:  Frank, your thoughts, it seems to me that a number of these reputational issues involving trading desks have been related to the pressure for outsides returns. So any perspective that you have on the reputational component here.

Frank Childress:

Yeah, absolutely. So as you mentioned, firms that are or that may have lightened up on their compliance around the use of leverage or chasing returns. In other cases, it’s technology events that can create undue risk or potentially create a reputational or trading issue. For firms, it’s basically, you can’t let your guard down, as you mentioned, with reputational risk. Over my career, I’ve become increasingly more respectful of the impact of reputational risk. It’s one of those things that once it starts to leak, it draws additional attention and it’s harder to get to reign in. So you can never relax and think you’re in a good place. You’ve got to constantly be diligent with respect to your trading desk and your controls and your risk management. Because the reputational risk issue is a hard one to get back in the box once you lose it. And the regulators don’t ignore that either. They make it more difficult on you once you’ve had even a minor blush or something more significant. So it’s certainly a humbling and a critical one to keep your eye on.

Bob Mooney:  Well, I think we’ve covered enough for today. Thanks, Frank and Jeff, and thanks everyone for listening. If you’d like to learn more about how Oyster can help your firm with trade desk compliance and best practices for managing reputational risks, best execution, communications, and market access, visit our website at

About The Podcast Speakers
Photo of Bob Mooney

Bob Mooney

Bob Mooney serves as General Counsel for Oyster Consulting, bringing deep compliance and risk leadership experience. Bob’s executive roles managing risk and controls for Wells Fargo Advisors’ Wealth and Investment Management businesses, in addition to his roles of Chief Compliance Officer and Chief Administration Officer, provide him with a perspective that expands Oyster’s ability to view issues through many vantage points.

Photo of Jeff Gearhart

Jeffrey Gearhart

Jeffrey Gearhart is an intuitive, analytical leader with over 30 years of experience in banking and capital markets businesses. Prior to joining Oyster, he held senior leadership roles with The Bank of New York Mellon, including business line COO, CFO, business development and relationship management.

Photo of Frank Childress

Frank Childress

Frank Childress is an engaged and respected Financial Services professional with over 35 years of industry experience. Frank has extensive expertise in Equity and Fixed Income Trading, Equity Market Structure, and Capital Markets Products for retail distribution.

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