The Investment Industry Regulatory Organization of Canada (IIROC) Tuesday published new draft guidance, confirming that it considers certain high-frequency trading (HFT) strategies to be manipulative or deceptive, and against the trading rules.
IIROC has released draft guidance that stress that the self-regulatory organization (SRO) considers tactics such as layering, quote stuffing, quote manipulation, spoofing, and “abusive liquidity detection”, to be market manipulation under the trading rules.
These sorts of abuses aren’t exclusively the domain of high-frequency, or algorithmic, traders, but they may be easier to carry out with this sort of technology, on a larger scale, and may pose systemic risks to market integrity, the guidance notes.
However, the IIROC guidance also stresses that it is the abusive nature of the practice, not the means to conduct it, that harms market integrity. These kinds of trading practices are prohibited, whether they are conducted manually or electronically, and whether they rely on automated order systems and direct electronic access, or not, the notice points out.
In addition to confirming that IIROC considers certain trading strategies to be violations of market integrity rules, the guidance also spells out that, as gatekeepers to the securities market, dealers must develop and implement appropriate policies and procedures to effectively address, detect, prevent and report manipulative and deceptive activity. And, it notes that its trade desk reviews will examine these sorts of policies and procedures to assess their adequacy.
In its notice, IIROC reports that industry estimates put HFT activity at between 25% and 40% of trades on Canadian marketplaces. And, it notes that it is currently working on a study of HFT activity in the Canadian market that will provide an impact analysis of the effects of HFT on market quality and integrity.
It also says that it is enhancing its monitoring capabilities through automated regulatory alerts “to detect highly-automated manipulative activity that may otherwise be challenging to identify”. IIROC adds that its HFT study may also generate further insights into novel forms of manipulative and deceptive activity requiring additional alerts.
Comments on the proposed guidance is due by October 15.