Market Regulation Services Inc. said Thursday a detailed trading review found no systemic front-running, but did uncover some gaps in the rules, its powers of surveillance and brokers’ understanding of the rules.

The review was conducted in 2004 in response to traders’ complaints about suspected front-running. It examined the handling of large block orders in the Canadian equity markets, “to assess whether there is a previously undetected problem of systematic front-running.

The review consisted of interviews with buy-side firms, reviews of sell-side policies, procedures and operations, a detailed review of large orders traded in the market, and, detailed investigations of all problems detected in the trade record. It found no evidence of systematic front-running activity or substantive client priority violations.

RS said, however, it did uncover a number of issues that need to be addressed to improve the regulatory program and market oversight, including:

  • the perception by both buy-side and sell-side firms that there is serious information leakage about pending transactions and large orders as well as inappropriate disclosure of confidential client information;
  • buy-side firms misunderstand some of the trading rules, and;
  • the current audit trail does not provide RS with reliable access to information on client-trader communications and activities that occur before an order is placed.



The report contains 13 recommendations to resolve the issues the review uncovered.

RS said there is confusion among firms that “expressions of interest” are protected by the front-running rule, when in fact only firm orders are protected. As well, many traders operate as though their clients have given blanket consent to trade ahead or alongside, which is contrary to the current rule on client priority. Finally, there is widespread concern by buy-side firms about the lack of transparency resulting from marking trades as anonymous, and some additional concerns about jitney trading.

The regulator says that it will now begin studying and implementing the report’s recommendations, including preparing notices reminding brokers of the importance of maintaining the confidentiality of information relating to pending transactions and large orders, and developing training materials on the front-running and client priority provisions of trading rules.

It also intends to explore with the Canadian Securities Administrators the type of information that regulators should be able to obtain relating to communication and activities prior to an order being placed.

Finally, RS says it will assess the need for amendments to elements of the front-running and client priority provisions of trading rules, as the report recommends.