Turquoise, the high-profile multilateral trading system (MTF) in Europe founded by nine investment banks to compete with the London Stock Exchange and other traditional exchanges, has hired Progress Software and Detica to develop a real-time market surveillance system.

“They realize they want to have a really advanced market surveillance system to be able to detect market abuse such as transactions that may influence the price or the volume in the market,” comments Dr. John Bates, founder and general manager of the Apama division of Progress Software referring to Turquoise “This will act as a deterrent to things that could happen,” adds Bates.

The move follows a similar deal by the U.K. ‘s Financial Services Regulator (FSA) last summer to retain Progress Apama and Detica last summer to deliver a real-time market surveillance system. “When the FSA announced they were going to have a real-time market survival system they were the first regulator to do it,” says Bates. Turquoise is regulated by the FSA.

“Market surveillance is a vital requirement for any stock exchange,“ stated Eli Lederman, Turquoise’s Chief Execution. In the statement, Lederman noted that Turquoise will be gaining a very flexible system that can be used to add value to market data it collects, and to offer other client services such as detailed analysis of transaction costs, price improvement and performance.

The real-time and post-trade surveillance system will be a combination of Progress Apama’s Complex Event Processing (CEP) Platform and Detica’s market surveillance and trading expertise.
CEP technology is necessary because “You need to take in vast quantities of real-time data and compare them against patterns that show abuse and display the patterns to be visualize them in real time,” explains Bates.

“They’re encoding t he patterns in our platform that will detect and trap the potential market abuse. So every time data changes in the order book and new bids and offers (enter Turquoise), it generates events that are fed into Apama and it’s compared,” to these patterns that are visualized on a screen, says Bates.

Some of the types of patterns that can be detected are front-running of orders, which happens if a broker places a proprietary order in front of a client order and fictitious orders, where the orders are placed by a broker on behalf of a client without any intention of execution to inflate prices. Another abuse is price ramping where people buy available volume in the market as a manipulative transaction to cause the price to increase, notes Bates. Another tactic is known as “painting the tape” where people move the price up by taking the best offer price repeatedly in the market.

“If you detect a trader or an institution has done something, which on its own may be potentially innocent but it’s done that three times in the last two days, they might want to take some action there,” advises Bates. Since the platform can record what happened in the past, they could check the history of a firm’s trading patterns and cross reference to it.

Market surveillance operators at Turquoise will have dashboard screens that will show what market patterns have been detected. They could have heat maps that show all the individual stocks, Bates explains. As potential abuses happen, the stocks might get redder and redder in color. Or, using heat maps, they could monitor activity on an institution-by-institution basis.

Turquoise is targeting September 2008 as its go live date, according to an update that it gave to Advanced Trading last week.

Down the road, Turquoise is quite interested in using the exact same platform to calculate performance, comparing Turquoise’s performance to other platforms in Europe.