Canada Imposes High-Frequency Trading Obligations
Canadian securities regulators have launched sweeping policies aimed at controlling risks associated with the speed and automation of electronic trading, and ensuring that marketplaces actively monitor their risks.
The framework, called National Instrument 23-103, will require marketplace participants who enter orders electronically to maintain policies, procedures, and controls to manage the risks associated with electronic trading.
High-frequency trading now accounts for 42% of all trades in Canadian markets, according to a study by the Investment Industry Regulatory Organization of Canada (IIROC).
NI 23-103, which is to go into effect on March 1, 2013, imposes requirements on marketplaces for availability of order and trade information, marketplace controls relating to electronic trading, marketplace thresholds ,and erroneous trades.
The marketplace threshold requirement, which is part of the follow-up to the events of the May 6, 2010 “flash crash,” is intended to complement both IIROC’s single stock circuit breaker policy and its proposal for market-wide circuit breakers.
“All these systems are complex, and since we are constantly introducing new utilities, functionality, technology and various upgrades to remain competitive, things will go awry,” said Jeff Wells, vice president of product marketing at Exegy.
This is the way we all progress,” Wells said. “The winners will be those who balance the adoption of new technology with business risks. Those who stand still may be reliable but they will also be left behind. How much trading is done on the floor exchanges these days?”
Concurrent with the implementation of NI 23-103, IIROC is proposing amendments to its Universal Market Integrity Rules (Umir), in order to align market trading rules with NI 23-103.
The amendments introduce specific supervision and gatekeeper obligations for IIROC dealer members in order to help mitigate the risk related to electronic trading, increasing levels of speed and the automation of trading.
“Technology is less expensive now than at any time in history,” said Dr. Jock Percy, CEO of Perseus Telecom. “Certainly, the cutting edge providers cost more and may be a barrier for many to enter, but the reality is that the landscape of trading technology has flattened significantly.”
Canadian regulators are of the view that the controls enumerated in NI 23-103 are essential in maintaining the integrity of marketplace participants, marketplaces and the Canadian capital market as a whole.
“The regulatory obligations in this new rule provide better protection for investors and support the integrity of Canada’s capital markets by outlining the obligations required when participating in this activity,” said Bill Rice, chair of the Canadian Securities Administrators (CSA) and CEO of the Alberta Securities Commission, in a statement.
The rule, which was first proposed in April 2011, was developed following consultations with marketplaces, marketplace participants, and service vendors, and is consistent with international approaches to regulating electronic trading, according to the CSA.
The pace of technological innovation in the realm of exchange trading has made HFT and algorithmic trading a core component of most trading strategies.
“Fifteen years ago, a dedicated connection to the CME from Europe cost $150,000 per month,” said Percy. “Now you can have the same connection for a 100th of the cost. The same goes for other infrastructure required to compete with the biggest in the business.”
They can be used on quantum hardware expected to be available in 5 to 10 years.
Streaming blocks change the basis of matching and price discovery so institutions can find new liquidity.
Clients can fine tune their pricing function via APIs and exposed user-defined settings.
Orders executed away from public markets can have measurable implications on execution costs.
To level the playing field the rules should apply to both systematic internalisers and trading venues.