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A necessary first step toward enforcement of securities laws is surveillance (Domowitz 2012). Put differently, without surveillance, no enforcement of trading rules occurs. Surveillance refers to automated computer algorithms that are used to detect manipulative trading patterns identified earlier. Surveillance algorithms send messages called “alerts” to staff that work at securities commissions or the authority that governs the particular stock exchange. The alerts are in real time, meaning that market abuse is detected immediately. With one-time behavior, a manipulation might lead a surveillance authority to call the trader(s) involved for an explanation. Normally traders have an “alternative plausible explanation” (APE) to explain why they executed the trades in question. However, with repeated pattern behavior, the surveillance authority can more easily prove misconduct and pursue a legal remedy.

Computer software providers, such as SMARTS Group, Inc., had provided software to over 50 exchanges around the world before being acquired by NASDAQ in 2010. Such software customizes its system to manage the type of alerts provided to surveillance staff. Such customization is necessary as each exchange or securities commission around the world differs in scope and requirements for surveillance. The set of alerts in conjunction with manipulative practices depicted in Cumming et al. (2011) is comprehensive for most surveillance systems. These alerts apply to both single-market manipulations and cross-market manipulations. Cross-market surveillance refers to surveillance across different products, such as equity and a related option on the same underlying equity, and across markets or different exchanges or different countries. Cross-market surveillance is much more technical to perform and execute in terms of computing power.

Moreover, cross-market surveillance requires information-sharing agreements across exchanges. Cumming and Johan (2008) present evidence from 25 markets around the world, showing that many exchanges in Europe did not have effective market surveillance at the time of the national implementation of MAD. However, such surveillance was in place around the time of MiFID. As such, Cumming and Johan (2019) are highly critical of derivative work (Christensen et al. 2016) that replicates earlier studies of the impact of market trading rules on market liquidity (Cumming et al. 2011) using MAD adoption dates and not MiFID adoption dates.

The effectiveness of the surveillance systems in different jurisdictions around the world depends on various factors (Cumming and Johan 2008).

 Alerts should minimize false positives and maximize true positive manipulative practices. To be able to do this, the surveillance system needs to ascertain normal trading activity to set the abnormal alert parameters. For example, normal price and volume measures need to be set for typical trading ranges for a particular exchange-traded product.

 A surveillance department should be able to reconstruct all trading activity to replay the full order/quote schedule. Market surveillance should also identify the activity of each market participant.

 The surveillance staff should be versed on the issues that need to be investigated. A surveillance system's quality depends on the quality of the software used and the degree to which the surveillance staff are educated and trained on using the information provided in the alerts.

 The effectiveness of a surveillance system also depends on the degree to which market participants are informed about the surveillance activities.

 For cross-market surveillance, surveillance effectiveness depends to a large degree on the extent to which information is shared across jurisdictions.

 The efficiency of the surveillance system depends on the regulatory framework. In many jurisdictions around the world, the exchanges themselves are self-regulatory organizations (SROs) that establish their own listing standards and monitor and discipline market participants for violation of their rules of operation. In other jurisdictions, the securities commission has a greater role in setting listing standards and trading rules.