The dramatic rise of AI intrigued financial markets, the fallout of 2022’s sweep of WhatsApp fines for the major banks continued to spill over, and spoofing continued to make headlines throughout the year. In this blog we take a look at just some of the key news stories which rocked financial markets and regulated industries over the last 12 months.

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WhatsApp fallout

The lava from the eruption of regulatory fines dished out by the SEC and CFTC in 2022 has continued to spill out, engulfing more and more financial institutions in a chasm of regulatory smog this year. In August, the SEC and CFTC announced a combined $549 million in penalties against Wells Fargo and a raft of smaller or non-U.S. firms that failed to maintain electronic records of employee communications, having swept through the largest banks on Wall Street in late 2022 to impose over $2billion in record-keeping related fines.

In the same month, British regulator Ofgem fined Morgan Stanley £5.41m after energy traders discussed business over WhatsApp on private phones, with the bank failing to record the messages. The FCA also launched an inquiry this year into banks’ use of WhatsApp on personal devices for trading.

“These fines and continuing scrutiny from regulators do nothing to change the fact that WhatsApp is still the go-to form of communication between investment banks and their clients. Aiming to change an entire generation’s communication behaviour is not a feasible way of tackling this issue – it is instead up to banks to adapt their approach to risk management to cater for the modern ways of doing business, and satisfy regulators that the messages are being recorded and monitored.” – Oliver Blower, VoxSmart CEO.

This story continues to unfold.

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Artificial intrigue

With the public launch of Chat GPT late last year, 2023 has seen the increasing proliferation of every man and his dog speaking about AI and its role in financial markets. However, most of the dialogue has been definitively abstract, with even global institutional investors appearing to be gripped by the constant hyperbole.

This hype bled over into VC funding, with the big deal of the year being a $10 billion deal to OpenAI, standing in stark contrast to the significant drops in startup funding on offer this year to fintechs.

What we now want to see is more discussion around practical use cases, and where to start rolling AI out in financial markets in the short term.

“If you are a senior executive within an investment bank being bombarded with all this AI literature, where on earth do you start? In our view, with AI, we could very well be on the cusp of a paradigm shift in fixed income markets – if applied correctly. Existing AI technology can be applied to massive, disparate datasets that are relevant to fixed income desks, and help them to address long-standing pricing and liquidity issues that permeate this market due to its largely OTC nature.” – Oliver Blower, VoxSmart CEO.

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Spoofing doesn’t slow

Spoofing is one of the most constant forms of market abuse that seems to crop up, and 2023 was no different. Spoofing is where traders place market orders, before cancelling them prior to the order being fulfilled, with the intention of producing the appearance of market activity to deceive other market participants and turn a quick buck. Bank of America, TD Securities, Openmarkets, JP Morgan, and UBS all made headlines this year for alleged incidents of spoofing various markets – it seems this is one issue that continues to rear its ugly head. However, by using technology that can effectively and efficiently reconstruct trades through the linking of trade and communication data, financial institutions can ensure that they have another level of protection against this market abuse.

“Spoofing is an unfortune by-product of the fact that certain traders have always, and will always, look to manipulate the markets for personal gain. But this does not mean that the industry is full of bad actors. More and more financial institutions are currently looking to reconstruct orders to try and figure out the exact sequencing that takes place.” – Oliver Blower, VoxSmart CEO.

Never a dull year in financial markets, the regulators’ offices, or compliance desks! And the stories that have defined this year in regulatory compliance are by no means resolved – in the case of AI and its role in financial markets, it is arguably just getting started.