Amid growing concern over the effects of high-frequency trading, and changes in market structure generally, Canadian securities regulators are once again proposing rules to address the provision of direct electronic access.
The Canadian Securities Administrators (CSA) Thursday announced proposed amendments to its pending electronic trading rules (which are due to take effect March 1, 2013), which will provide a framework for the provision of direct access.
Amendments concerning direct electronic access were first published back in April 2011 as part of new rules addressing electronic access generally, however, the CSA decided not to finalize the direct access portion of the pending electronic trading rules, so that they could be harmonized with planned changes to the trading rules administered by the Investment Industry Regulatory Organization of Canada (IIROC). Both sets of proposed amendments are being published for comment Thursday.
The CSA’s proposed changes introduce a framework for the provision of direct electronic access, which includes setting standards for direct access clients, requiring written agreements and adequate training. Under the CSA’s proposed amendments, only investment dealers can provide direct access, and only portfolio managers can use it.
The previous version of the rules would have allowed dealers to also be direct access clients, but the rules relating to dealer-to-dealer order routing are now being dealt with in IIROC’s proposed amendments. Also, the CSA rules continue to ban exempt market dealers from using direct access, noting that it believes that dealers should be subject to IIROC’s trading rules if they are engaging in this type of equity trading. However, the proposed amendments continue to allow individuals to obtain direct access, subject to standards imposed by the dealer facilitating that access.
IIROC says that its proposed amendments “are intended to provide a comprehensive framework to regulate various forms of third-party electronic access to marketplaces” and complement the CSA’s proposals.
“In recent years there has been a proliferation of sophisticated, high-speed trading technology that has caused various risks to emerge including financial, regulatory, legal and operational risks associated with electronic access to marketplaces. IIROC believes that there should be a common set of rules for the granting of direct electronic access that applies across all marketplaces. This common set of requirements would protect overall market integrity and facilitate trading in a multiple marketplace environment,” it says.
Among other things, IIROC’s proposed amendments introduce: requirements for dealers providing direct access; provisions governing routing arrangements between dealers; requirements for the supervision of orders; and, establishes gatekeeper obligations on a marketplace that provides access and on dealers that provide direct electronic access.
It is also proposing amendments to its dealer rules to provide an exemption from the suitability obligations for direct access orders; prohibit dealers that offer order execution services to retail customers from allowing their clients to use automated order systems, or allowing them to manually send orders that exceed a limit on the number of orders set by IIROC.
“Today’s proposals are an important step in establishing a framework for direct electronic access and greater controls to mitigate and manage the risks created by high-speed automated trading,” said Bill Rice, chair of the CSA and chair and CEO of the Alberta Securities Commission. “As technological innovations evolve, it is imperative that securities regulators continue to focus on this area in order to maintain fair and efficient capital markets in Canada.”
Both sets of proposals are out for comment until January 23, 2013. IIROC also plans to hold information sessions on its rules, in order to facilitate informed comment. The dates and locations of those sessions will be published in a separate notice in the near future, it says.