Part 2: Change: Are we headed for a flock of swans?

Should we be planning more for ‘Black Swan’ events? Are they really that uncommon anymore? Business leaders talk of an impending U.S. recession, commodity super cycles and those of us in the U.K. woke up to news this week that COVID-19 cases are back on the rise. Whilst these can have a significant impact they are, to some extent, scenarios firms can prepare for.

In his book of the same name Nicholas Taleb stipulates three core ingredients for a so called ‘Black Swan’:

• It is an outlier with nothing in the past that suggested its possibility
• The event carries an extreme market impact
• After the event it may be deemed as explainable and predictable

(side note: the collective noun for a group of swans on the ground is a 'Bank' ... i'll leave that one with you!)

Let’s look at some of these with the aid of an interesting post on visualcapitalist.com:

In the twenty-seven years between 1973-2000 there were four lasting macroeconomic events that have resulted in a loss of >5% of the S&P 500, these being: (i) 1973 Israel/Arab War/Oil Embargo (ii) 1979 Iranian Hostage Crisis (iii) 1987 Black Monday (iv) 1991 First Gulf War.

Since 2000 there have been no fewer than seven (if you include Ukraine), these being: (i) 2001 9/11 Terrorist Attack (ii) 2003 SARS Outbreak (iii) 2008 Global Financial Crisis (iv) 2011 Libya Conflict (v) 2016 Brexit Vote (vi) 2020 COVID-19 and (vii) Ukrainian crisis.?In fact if we went back to 1959 (63 years) more than 75% of the largest single day moves (+/-) have come since 2000. Furthermore, 63% of the largest single weekly moves and 40% of the largest monthly moves.

So what does this mean?

Well, it would be fair to say that the number of short, sharp shocks causing significant impacts on global markets are on the rise. There are a number of theories as to why this is, however it seems apt to say that a growing, more technologically interconnected global population is giving rise to a higher risk of price contagion when market shocks occur. Something that is surely only going to continue.

So how does this impact compliance professionals?

As I pointed out in my last post, the pace of change in capital markets has been stark. Whilst just three of the above 'swans' have occurred since the 2016 Market Abuse Regulation (MAR) came into effect, each has had far reaching consequences on regulations, from the way they’re interpreted to the technology used to manage their impacts. Regulators have increasingly rattled their sabres, pointing at continual reviews and holding to account those who don't have procedures or sufficient insight into their own behaviours (see: FCA: Market Watch 69).

RegTech providers need to be ever more on the front foot, leading the discussion proactively rather than reactively. It's no longer okay to deploy a 'tick box' and firms are expected to stress test and evidence their detailed due diligence.

Furthermore the regulators themselves are investing. Here in the UK the FCA recently announced in its 2022-25 Strategy Document that:

“Over the next two years, we will improve our ability to detect market abuse, through a significant upgrade in our market surveillance systems. This will enable us to keep pace with evolving market abuse techniques and take advantage of advancements in big data analytics. This will include moving our market monitoring capability closer to real time and improving our data capabilities so that, in the future, we can better monitor a broader range of asset classes”.?

So whilst trading behaviours change, so must the technologies that keep abuse at bay. Efficiencies must be found for the growing workloads of the surveillance analysts, but not at the expense of results.

“What's dangerous is not to evolve.” -Jeff Bezos