Market Regulation Services Inc. has published a statistical survey of failed trades. The study found that such trades are not a big problem in the Canadian market.

The purpose of the study was to provide empirical data on the prevalence of failed trades, including the role of short sales in the occurrence of failed trades. It notes that RS staff are participating in an informal working group comprised of staff from the Investment Dealers Association, the Canadian Depositary for Securities Limited and the Canadian Securities Administrators that is currently examining issues relating to failed trades and short sales, including the role that short sales play in the occurrence of failed trades.

“Recent changes to the short selling regime in the United States, have prompted discussion amongst various Canadian market participants as to whether importing a U.S.-style approach to regulating short sales and failed trades would be appropriate for the Canadian equities market,” it notes.

The study found no evidence of excessive or prolonged “fails” on Canadian marketplaces. Only 0.27% of trades by study participants failed to settle. The predominant cause of failed trades was administrative delay or error accounting for almost 51% of “fails”; less than 6% of fails resulting from the sale of a security involved short sales; fails involving short sales are projected to account for only 0.07% of total short sales; the more “junior” the marketplace in terms of the type of security traded, the higher the incidence of failed trades; special settlement trades experienced a significantly higher rate of failure; and, approximately 88% of failed trades settled within five days after the “expected” settlement date, with 98% settling within 15 days after the “expected” settlement date.

RS says it is considering several recommendations regarding short sale and failed trade regulation in Canada. These recommendations include analyzing possible amendments to the existing trading rules. “The concept of short sale regulation and failed trade regulation are distinct and measures adopted to address failed trades should be broad enough to encourage timely settlement of trades in all circumstances and not just trades involving short sales,” it says.

RS says that any proposed amendments to the rules should be part of a coordinated and comprehensive response by the self-regulatory organizations and securities regulatory authorities to the issues of short sales and failed trades.