Benefits of dark trading rules outweigh costs: IIROC

Commenting on the IIROC Study of the Impact of the Dark Rule Amendments, which was also released Thrusday, Kriegler noted that the visible markets have benefited from IIROC’s rules in this area.

The study found that IIROC’s amendments dramatically reduced trading volume in the dark, and that this volume has not recovered. It also found that individual dark trading venues and brokers were impacted differently, based on their service models. In short, trading costs rose for active retail flow, and decreased for passive high frequency traders (HFT). Overall, retail flow as a whole (active and passive) and, the trading community as a whole, “were not impacted”, it found.

Traders that are hoping that regulators might relax their approach to trading in the dark on domestic markets will be disappointed, as Kriegler suggests that the regulator is not about to reverse its position on dark trading rules. “Both the IIROC paper and an independent academic study commissioned by IIROC that was released in March tell us that the benefits resulting from the dark rule amendments have indeed outweighed the costs,” he said. “We can therefore conclude that our regulatory objectives were accomplished with acceptable impacts to market quality.”

The conclusion comes amid recent comments from a number of industry firms, suggesting that IIROC should consider scrapping its dark pool rules, rather than introducing new measures designed to prevent the flow of retail volume to the U.S. to trade in dark pools there. Yet, while he defended the existing dark pool rules, Kriegler indicated that IIROC is not yet committed to adopting a new anti-avoidance provision that was proposed earlier this year.

“This provision would help ensure that orders that contribute to healthy price discovery are not by-passed by orders routed to a foreign jurisdiction — orders that can step ahead of the Canadian posted orders by an amount that would not be acceptable in Canada,” he explained. “At the same time, we recognize that the proposed provision could reduce the incentive for domestic exchanges and ATSs to innovate and compete. There would be less pressure for Canadian markets to lower trading costs.”

To further explore these issues, Kriegler said that IIROC will be hosting a roundtable in late June to address the impact of routing of retail orders to U.S. broker-dealers that will allow participants “to propose and debate potential alternatives to address this important issue.”

The roundtable is slated for June 23 at IIROC’s Toronto office, with attendance limited to presenters and regulators. IIROC says that it will select the roundtable presenters to reflect a diversity of views and enable a balanced discussion.

In his remarks, Kriegler also highlighted IIROC’s new debt transaction reporting rule, which will take effect in November, and will require IIROC firms to report all of the debt transactions they execute. “As a result, IIROC will be better able to monitor and enforce compliance with our investor protection and market integrity rules in a cost-effective way – and in a way that’s consistent with the type of equity market surveillance we already conduct,” he noted.

Moreover, this enhanced oversight of the debt markets will also enable it to consider whether any regulatory action is required to deal with any unfairness that may be uncovered in that market. “To that end, one of our first priorities will be to conduct a review of how dealers are currently allocating new debt issues,” he said.

Kriegler also reported that IIROC has enjoyed much better collection rates on enforcement penalties imposed in Quebec after the government there amended its laws to allow the regulator to enforce collections of its disciplinary penalties as if they are court decisions (a power it also has in Alberta). Last year, Kriegler said, IIROC had its highest fine collection rate in Quebec, 59%, versus just 17% nationally.

IIROC is seeking similar authority in other provinces. “We are continuing to pursue as a priority similar measures in the provinces where they don’t currently exist,” he said.