Canadian Dealers Face Pre-Trade Risk Mandate

Terry Flanagan

Canadian securities dealers are under pressure to implement pre-trade risk checks as a regulatory deadline approaches.

The regulatory framework, called National Instrument 23-103, will require market participants who enter orders electronically to maintain policies, procedures and controls to manage the risks associated with electronic trading.

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.

“Every dealer will be required to have pre-trade risk filters that meet new criteria for risk management,” said Sean Debotte, director of business development at Omega ATS, a Canadian alternative trading venue. “That filtering will need to happen instantaneously, in other words, without impacting latency.”

Omega ATS, in collaboration with its technology provider Orbixa Technologies, has launched a pre-trade risk system for Canadian marketplace participants.

The system combines the Orbixa Dill risk-monitoring software with the Omega ATS platform to provide a turnkey system that’s compatible with most order management systems and automated trading engines.

Automated trading strategies introduce a level of complexity and sophistication which has the potential to increase systematic risks, which has led to NI 23-103 and its U.S. counterpart, SEC rule 15c3-5, known as the market access rule.

TMX Group, Canada’s top exchange operator, earlier this year launched a service intended to control risks associated with automated trading, in part in response to new regulations that go into effect next year.

The service, called TMX Pre-Trade Risk Management Solution, provides provide clients with connectivity and technology needed for high performance pre-trade risk-filtered access to all Canadian equity marketplaces.

The TMX fully-managed hosted service, which is deployed across the Toronto Stock Exchange, TSX Venture Exchange and TMX Select, uses risk management technology supplied by Mantara, whose core brand, Expressway, is used by major banks and institutions to detect and eliminate faulty trades.

While most buy-side firms will expect the sell side to pick up the tab for compliance with market access and to provide auditable proof of compliance, the costs of compliance will be felt across the board.

“At this point, everyone recognizes that compliance requirements aren’t going to get less onerous in the future,” said Jay Hinton, global product manager at Mantara, a technology provider. “Shops that can afford to bring compliance in house cheaper than outsourcing it, will.”

Orbixa Dill performs the required risk checks needed to comply with NI 23-103. It can be deployed between any Omega subscriber’s order management system and that subscriber’s Omega connection. “Our solution is co-located with Omega as
well as other Canadian marketplaces,” said Debotte at Omega ATS. “It’s completely destination-agnostic, and we have every major dealer connected.”

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