Welcome to IIROC „Tips for Traders‟ In the Crossfire of Change
Canadian Security Traders Association Deerhurst, Saturday, August 16, 2008
IIROC Presenters
Mike Prior Vice President, Surveillance James Twiss Vice President, Market Regulation Policy
Topics
Amendments to the “Best Price” Rule “Off-Marketplace” Trades / Bypass Orders Proposed Changes to “Short Sale” Rule Regulatory Marker Correction System Supervision of Algorithmic Trading
“Best Price” Rule
In December of 2007, RS requested CSA approval of a 1-year exemption Exemption rejected by CSA but approval granted for “interim” amendments pending introduction of “trade-through protection” by CSA Published May 16, 2008 (Market Integrity Notice 2008-009)
“Best Price” Rule
“Interim” Amendments clarify what IIROC will consider as “reasonable steps” Obligation limited to better-priced orders on a “protected marketplace”
Generally, “deemed” compliance if rely on:
Marketplace functionality;
Smart Order Router; or
Jitney handling by another Participant
“Best Price” Rule
Expands factors that may be taken into account to include:
Recent launch of a protected marketplace;
Availability of order data through an information vendor; Material malfunctions or interruptions of service by a protected marketplace; and Whether the protected marketplace has demonstrated an inordinate proportion of “inferior fills”
“Best Price” Rule
IIROC expects to be notified immediately by a marketplace or a Participant experiencing material malfunction or service interruption
IIROC may require public announcement by a marketplace if the problem is “severe” or affects Participants generally If the problem is with the systems of the Participant or one of its service providers, IIROC expect the Participant to resolve the problem “asap”
“Best Price” Rule
Application at “time of execution”
Deals principally with orders entered on a nontransparent marketplace
Requires users to monitor protected marketplaces and adjust limits when “best price” moves
As a result of the “reasonable efforts” qualification, IIROC does not consider it a violation if the market moves following the routing decision by a smart order router
“Best Price” Rule
Elimination of “active” and “passive” distinction in the rule
IIROC considers an order that
“books-through” the best price and then is hit by an incoming order to be a violation by the Participant that “booked-through”; and Is “booked-through” by another order and then is hit by an incoming order is not a violation by the Participant whose order was booked
No obligation to monitor other protected marketplaces if the order has been validly booked
“Best Price” Rule
CSA “Trade-Through Protection” Proposal likely to be published early fall 2008 Expect that the obligation will be imposed at the “marketplace” level Marketplaces already preparing by developing routing capability
“Bypass Order” Marker
Approved by CSA on May 16, 2008 to be effective on a date determined by the Board of IIROC
Marker will facilitate trading with visible liquidity only
For use with:
“designated trade”; Orders entered on a protected marketplace to meet “best price” obligation in respect of trade on another marketplace
“Moving the Market”
Former rule required prior consent if moving market more than $1 for a stock trading up to $20 and $2 if more than $20
New rule applicable only to intentional crosses and pre-arranged trades
If price movement is more than the greater of:
5% or 10 trading increments, 5 minutes to move the market in an orderly manner; and
10% or 10 trading increments, 10 minutes to move the market in an orderly manner.
“Short Sales”
Recent concern in the US regarding “unbridled” naked short selling
No evidence of a “problem” in Canada Rule 2.2 of UMIR prohibits entry of an order without the “reasonable expectation of setting any trade that would result from the execution of the order”
National Instrument 24-101 – Institutional Trade Matching and Settlement
“Short Sales”
IIROC continues to pursue proposed amendments on Short Sales and Failed Trades including:
Repeal of all price restrictions on short selling; Repeal of requirement to file short position reports; Introduction of a provision which would allow IIROC to designate particular securities as “ineligible” for short sales; and
Introduction of a requirement to file a report with IIROC in respect of “extended” failed trades (which have not been resolved within 10 days following original settlement date)
Regulatory Marker Correction System
Ensure accurate audit trail Replaces informal e-mail notifications Facilitates the correction of:
Insider and Significant Shareholder Statistics; and
Short Sale Summary
Regulatory Marker Correction System
Report is “order” rather than “trade” based (due to multiple executions from a single order)
Corrections for “bundled” orders may have a timestamp of “16:00” Bundled client/inventory orders can be unbundled when allocations are determined Corrections from “unbundling” insider, significant shareholder and short sales must be provided by end of trading day
Other corrections may be submitted when detected
Supervision of Algorithmic Trading
Market Integrity Notice 2008-003 – Guidance – Supervision of Algorithmic Trading (January 18, 2008)
Reminds Participants of the need for extra diligence when dealing with proprietary and third party “algo machines” Participants must be aware if DMA clients are employing “algo machines” IIROC may not be able to cancel or vary trades resulting from malfunctioning algos
Supervision of Algorithmic Trading
Trades in securities inter-listed with markets outside Canada may stand regardless of price or volume Participants must have the ability to “kill” a malfunctioning algo machine Regulatory intervention after the “malfunction” is not a substitute for thorough testing
In the Crossfire of Change
Questions?
Thank you for attending IIROC „Tips for Traders‟ In the Crossfire of Change
Canadian Security Traders Association Deerhurst, Saturday, August 16, 2008