Canada HFT Study Enters Final Phase

Terry Flanagan

The Investment Industry Regulatory Organization of Canada (IIROC) has chosen a third project team to assess the impact of high-frequency trading and related activity on Canadian equity markets as part of the final phase of its HFT Study.

“At IIROC, we believe it’s important to address identified regulatory concerns relating to HFT using empirical data and objective analysis to better understand its impact on market integrity and quality, as well as overall investor confidence,” Wendy Rudd, IIROC senior vice president, market regulation and policy, told Markets Media. “That’s why we launched our own HFT study in 2012.”

The comprehensive three-part study is designed to shed light on HFT and algorithmic trading activity in the Canadian equity markets, and uses data collected through STEP (IIROC’s Surveillance Technology Enhancement Platform) and stored in IIROC’s new Equity Data Warehouse, Rudd said.

“We are in the final phase (impact analysis) of our study and together with other market regulation initiatives, it will help IIROC and other Canadian regulators and market participants to better understand the nature and impact of this trading activity and inform any further policy making or regulatory interventions that may be needed,” said Rudd.

Kevin Sampson, vice president of business development and strategy at TMX Equities Trading, told Markets Media: “We support the direction IIROC is taking in conducting this study . We believe that taking an evidence-based approach to better understanding the role HFT plays in our market will lead to productive and healthy debate. It’s important to let the data and facts, rather than rhetoric, drive any policy decisions around HFT.”

IIROC’s HFT study will complement other initiatives already adopted by IIROC to govern high frequency and algorithmic trading. In particular, in 20I3 IIROC issued guidance on manipulative and deceptive trading. Surveillance alerts have been implemented and IIROC is actively monitoring to detect these rule violations.

The third team is comprised of two professors at renowned educational institutions in Chicago, who have extensive experience studying, teaching and publishing reports about HFT, algorithmic trading and other market structure issues internationally.

“At Aequitas, we are very supportive of any research or initiative that creates more transparency in the markets,” Jos Schmitt, president and CEO of Canadian exchange operator Aequitas Innovations, told Markets Media. “We are hopeful this next phase of the IIROC study will help investors and issuers build further understanding, clarity and awareness around the issues with, and benefits from, high-frequency trading.”

In April 2014, IIROC announced the selection of the first two project teams. All the teams will, as part of their research, have access to secure and “masked” data for the period of January 1, 2012 to June 30, 2013. IIROC expects to have the final phase of the three-part HFT Study completed by the end of 2014.

The impact analysis is the third phase of IIROC’s HFT Study. It follows the publication of the first two phases of the study in December 2012 which identified a study group of traders and offered a detailed, statistical analysis of their activity.

The team will examine the role of high-frequency traders as (non-designated) market makers in providing liquidity during periods of market stress. An increased prevalence of high-frequency trading is often associated with improvements in market quality and a more liquid market.

The team specifically plans to examine so-called “phantom liquidity” and whether it adversely affects the implementation shortfall of program trades by large institutional traders, in addition to market stability during periods of permanent price movements or increased volatility.

This liquidity provision will then be compared to that offered by designated market makers and other traders, both within and outside of stressful periods. This in turn may shed light on the stability of financial markets in which de-facto market makers may quickly withdraw.

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