Securities regulators issued final guidance to firms and traders that sets out the sorts of strategies that are considered manipulative and abusive in today’s high-speed trading environment, along with the obligations of firms to help guard market integrity.
The Investment Industry Regulatory Organization of Canada (IIROC) issued the final guidance Thursday, following up on consultations carried out last year.
The guidance indicates that while technological developments that empower phenomena such as high-frequency trading (HFT) and direct market access (DMA) may make the implementation of abusive trading strategies easier, and enforcement harder, it’s the underlying strategy that is potentially abusive.
“Active focus is being placed by the regulators on monitoring for and pursuing illegal practices, including strategies linked to algorithmic and HFT trading that are of a manipulative nature whether in a known or novel form,” it says.
The guidance targets five specific trading strategies that, it says, would be considered manipulative and deceptive: layering, quote stuffing, quote manipulation, spoofing, and abusive liquidity detection; and it provides guidance to both firms and traders. IIROC stresses that while these strategies are often associated with the use of automated order systems, including algorithmic trading and HFT, “these strategies are prohibited whether they are conducted manually or electronically.”
Additionally, it stresses that, as market gatekeepers, firms “must develop and implement appropriate policies and procedures to effectively address, detect, prevent and report manipulative and deceptive activity.” Failing that, disciplinary action may be taken against the firm, its management, and its directors, IIROC warns.
“In this changing environment where market structure and dynamics are evolving quickly, IIROC will continue to actively monitor for abusive practices as well as new forms of manipulation that may emerge,” said IIROC president and CEO, Susan Wolburgh Jenah.
IIROC also notes that its ongoing study of HFT is entering its third and final phase, which aims to explore the impact of this sort of trading on market quality and integrity, and will inform possible reforms.