Market Regulation Services Inc. (RS) is initiating a statistical study of failed trades on Canadian marketplaces.

The regulator says that the study will provide empirical data on the prevalence of failed trades, including the role of short sales in the occurrence of failed trades. It will also obtain information on the policies and procedures currently employed by firms for dealing with failed trades and for restricting orders for a short sale when there is no reasonable prospect of settling the resulting trade.

RS proposes to select up to 25 firms to participate in the study. Those selected to participate will be contacted by RS staff by July 31. It will provide a selected firm with a settlement date for which information will be required. The designated settlement date will be at least two weeks following the contact by RS. Participants will be asked to provide a list of all trades (both institutional and retail) executed on a marketplace monitored by RS (the Toronto Stock Exchange, TSX Venture Exchange, CNQ, BlockBook, Bloomberg Tradebook and Liquidnet) that were to settle on that date but failed to do so.

Based on this information RS intends to: assess the number of failed trades in the retail context versus institutional context; assess whether failed trades are more prevalent in a particular marketplace or type of traded equity security; calculate the percentage of fails that are attributed to short sales; catalogue the causes of failed trades; monitor the frequency and timing of “buy-ins” issued by participants; and, evaluate the internal processes employed by participants in the handling of failed trades.

RS notes that recent changes to the short selling regime in the US has prompted discussion amongst Canadian market participants as to whether importing a U.S.-style approach to regulating short sales and failed trades would be appropriate for Canadian equities markets.