IIROC Seeks to Foster Trust in Markets

Terry Flanagan

The Investment Industry Regulatory Organization of Canada has established as its primary regulatory aims fostering trust and confidence in the markets and maintaining optimal levels of liquidity and price discovery.

“Investors deserve and need a Canadian market they can trust and that they can count on,” said Wendy Rudd, IIROC’s senior vice president, market regulation and policy. “Those are tenets that go through everything that IIROC does. Investors need to know that the market has integrity and that the market operates in a fair and orderly way.”

Rudd is a panelist on the Main Debate of Markets Media’s Canadian Trading and Investing Summit, which will be held Wednesday April 1 in Toronto. The session will cover topics such as reversing the tide of southbound order flow, the role of exchanges, and updates on dark trading.

IIROC sets, monitors and enforces rules regarding the proficiency, business and financial conduct of all investment dealers in Canada as well as their individual registered representatives. It also sets and enforces market integrity rules regarding trading activity on Canada’s equity exchanges and alternative trading systems.

On Monday, IIROC issued revised guidance on the establishment and operation of price thresholds by Canadian marketplaces to further reduce short-term, unexplained price volatility and address risks arising from electronic trading. IIROC is proposing specific price thresholds beyond which a marketplace must preclude trading activity rather than allowing each marketplace to determine its threshold levels. All marketplaces, including dark pools, will be required to implement marketplace thresholds.

Wendy Rudd, IIROC

Wendy Rudd, IIROC

Other reforms that IIROC has implemented to reduce the number of erroneous trades and unexplained short-term price volatility include controls at the participant level through electronic trading rules (2013), implementation of third-party marketplace access rules (2014), and introduction of single-stock circuit breakers (2012).

Another aspect of fostering trust is protection from manipulation, which includes the surveillance systems that IIROC has in place to identify and deter manipulative trading and its ongoing study pertaining to high-frequency trading.

IIROC’s other major regulatory focus is on ensuring an optimal level of liquidity as well as a healthy level of price discovery. Examples are the dark rule in 2012, guidance issued last year on foreign organized regulated markets, and a proposed anti-avoidance rule.

“IIROC and the Canadian Securities Administrators have a fundamental concern with the impact that the wholesaling of Canadian retail flow could have on the Canadian market as a whole,” said Rudd. “Our concern is around the risk of hollowing out of the Canadian markets. It’s important for us to remember that we all have an obligation to protect and reward those that are willing to display passive liquidity on the Canadian risk markets.”

The anti-avoidance proposal, comments for which were due March 30, would permit market participants to execute small client orders on a non-Canadian market only when the order is entered on a foreign organized regulated market that displays order information, or the order receives meaningful price improvement.

Because resting liquidity is the basis for all price discovery, IIROC is seeking to strike a balance that enables Canadian and U.S. firms to compete and operate cost effectively. “A balance that doesn’t create a disincentive for orders to come into Canada from the U.S. or from elsewhere, but at the same time, ensures that we maintain that natural liquidity and price discovery process in the Canadian market,” Rudd said.

IIROC was “involved extensively with the Canadian dealers and buy side” in formulating the anti-avoidance proposal, said Rudd.

It’s considering having a forum for additional debate on the topic. “The key is that we’re listening very closely to the feedback, that we’re willing to consider compromises that help to achieve that balance,” Rudd said. “But at the end of the day, we have a responsibility as regulators to maintain healthy Canadian markets.”

Featured image via studio 58/Dollar Photo Club

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