1. P.O. Box 560 Concord, MA 01742 USA Tel: 1-978-318-0920 Fax: 1-630-604-7394 A Broad View of Market Surveillance Josh Galper Managing Principal November 2009

2. 2 What is Finadium? Securities finance, prime brokerage and custody Securities lending and short selling Collateral management Exchange-traded and OTC derivatives Bilateral and centralized clearing Account reporting Services for investors Exchanges and clearing Trading and custody in developed, emerging and frontier markets Risk management and product development Finadium is a US-based research and consulting firm with two practices in the financial markets industry

3. 3 Traditional market surveillance has focused on intra-exchange trade data Market surveillance teams have traditionally only had to worry about one market venue: their own Equities and options data can capture unusual trading behavior But new times call for new approaches to market surveillance The goal of these comments is to help you think broadly about the meaning and practice of market surveillance today

4. 4 There are many ways to manipulate a market Accumulating a large stock position while hedging out the economic impact with options Pushing up equity prices on exchange in order to cash out in an OTC equity derivatives markets Simulating a short sale using derivatives in order to avoid exchange restrictions The married put

5. 5 Example 1: Inside Information or Just Good Timing? Sources: S&P, Yahoo Finance

6. 6 Example 2: Inside Information or Just Good Timing? Sources: S&P, Yahoo Finance

7. 7 A new market environment requires adapting Regulators are considering expanding and centralizing market surveillance activity US recently called for centralized market surveillance for all liquidity centers MiFID and Reg NMS have caused exchanges to monitor competitor data as well Isolated data on one exchange miss activity on another Dark pools contain trading data that is captured next day or missed entirely All liquidity centers contain trade information, simply not all of it may be available in real time

8. 8 Our Conclusions Exchanges should think broadly about the meaning of market surveillance Bond, contracts for differences, single stock futures and securities lending data should all be included in market models Exchanges are tightly integrated with other markets What other kinds of market activity should be watched closely? Hedging vs. directional trades? Underlying identity of the client? News feeds?

9. 9 Contact Us Finadium LLC P.O. Box 560 Concord, MA 01742 USA Tel: 1-978-318-0920 Fax: 1-630-604-7394 www.finadium.com Josh Galper, Managing Principal jgalper@finadium.com