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What is Market Surveillance?

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  • Written By: Alexis W.
  • Edited By: Heather Bailey
  • Last Modified Date: 25 September 2016
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Market Surveillance is a department that works on the NASDAQ stock exchange, overseeing trades that occur. The Market Surveillance department is responsible for identifying any potential irregularities that occur in the trading of stocks on the NASDAQ. In other words, it acts as a security organization that watches for potential fraud, to protect the interests of investors who invest in the market.

The Market Surveillance department monitors and watches trades which occur on the NASDAQ. The NASDAQ is one of the stock exchanges in America, along with the Dow and the S&P. It is an electronic stock market, which means trades are made and executed electronically, instead of on the floor of the stock exchange.

When buyers purchase stocks on the NASDAQ, they do so primarily online, as it is an electronic exchange. While some telephone orders can be placed, most are conducted via the Small Order Execution System (SOES). This system was established after the stock market crash of 1987, during which brokers refused to answer their phones when clients wanted to trade stocks to get out of the NASDAQ.

Because the market is primarily electronic, market surveillance takes place online. Financial professionals and regulators monitor the online trades occurring, overseeing thousands of trades on a daily basis. They search these trades to identify anything that looks unusual or out of the ordinary that may be a sign of illegal or fraudulent activity.

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For example, unusual volume on a stock may be noticed. This can be an indication that a pump and dump is going on. A pump and dump is a type of fraudulent stock trading practice in which a brokerage firm or broker builds up a stock, advertising and selling excessively to clients even if the stock has no merit. The stock price rises based on these activities, the company makes a profit on its holdings of the stock, and then it stops building up the stock and the stock price plummets.

Market Surveillance also watches for indications of insider trading. This might involve an individual buying or selling unusually large amounts of a given stock immediately before a big announcement becomes public. The huge volume of a trade right before an announcement can be an indicator that the buyer or seller of the stock may have had insider information and thus acted illegally on the basis of that advanced knowledge.

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