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Welcome to IIROC Tips for Traders

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Participants must be aware if DMA clients are employing 'algo machines' ... Participants must have the ability to 'kill' a malfunctioning algo machine ... – PowerPoint PPT presentation

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Title: Welcome to IIROC Tips for Traders


1
Welcome to IIROC Tips for Traders
  • In the Crossfire of Change
  • Canadian Security Traders Association
  • Deerhurst, Saturday, August 16, 2008

2
IIROC Presenters
  • Mike Prior
  • Vice President, Surveillance
  • James Twiss
  • Vice President, Market Regulation Policy

3
Topics
  • Amendments to the Best Price Rule
  • Off-Marketplace Trades / Bypass Orders
  • Proposed Changes to Short Sale Rule
  • Regulatory Marker Correction System
  • Supervision of Algorithmic Trading

4
Best Price Rule
  • In December of 2007, RS requested CSA approval of
    a 1-year exemption
  • Exemption rejected by CSA but approval granted
    for interim amendments pending introduction of
    trade-through protection by CSA
  • Published May 16, 2008 (Market Integrity Notice
    2008-009)

5
Best Price Rule
  • Interim Amendments clarify what IIROC will
    consider as reasonable steps
  • Obligation limited to better-priced orders on a
    protected marketplace
  • Generally, deemed compliance if rely on
  • Marketplace functionality
  • Smart Order Router or
  • Jitney handling by another Participant

6
Best Price Rule
  • Expands factors that may be taken into account to
    include
  • Recent launch of a protected marketplace
  • Availability of order data through an information
    vendor
  • Material malfunctions or interruptions of service
    by a protected marketplace and
  • Whether the protected marketplace has
    demonstrated an inordinate proportion of
    inferior fills

7
Best Price Rule
  • IIROC expects to be notified immediately by a
    marketplace or a Participant experiencing
    material malfunction or service interruption
  • IIROC may require public announcement by a
    marketplace if the problem is severe or affects
    Participants generally
  • If the problem is with the systems of the
    Participant or one of its service providers,
    IIROC expect the Participant to resolve the
    problem asap

8
Best Price Rule
  • Application at time of execution
  • Deals principally with orders entered on a
    non-transparent marketplace
  • Requires users to monitor protected marketplaces
    and adjust limits when best price moves
  • As a result of the reasonable efforts
    qualification, IIROC does not consider it a
    violation if the market moves following the
    routing decision by a smart order router

9
Best Price Rule
  • Elimination of active and passive distinction
    in the rule
  • IIROC considers an order that
  • books-through the best price and then is hit by
    an incoming order to be a violation by the
    Participant that booked-through and
  • Is booked-through by another order and then is
    hit by an incoming order is not a violation by
    the Participant whose order was booked
  • No obligation to monitor other protected
    marketplaces if the order has been validly booked

10
Best Price Rule
  • CSA Trade-Through Protection Proposal likely to
    be published early fall 2008
  • Expect that the obligation will be imposed at the
    marketplace level
  • Marketplaces already preparing by developing
    routing capability

11
Bypass Order Marker
  • Approved by CSA on May 16, 2008 to be effective
    on a date determined by the Board of IIROC
  • Marker will facilitate trading with visible
    liquidity only
  • For use with
  • designated trade
  • Orders entered on a protected marketplace to meet
    best price obligation in respect of trade on
    another marketplace

12
Moving the Market
  • Former rule required prior consent if moving
    market more than 1 for a stock trading up to 20
    and 2 if more than 20
  • New rule applicable only to intentional crosses
    and pre-arranged trades
  • If price movement is more than the greater of
  • 5 or 10 trading increments, 5 minutes to move
    the market in an orderly manner and
  • 10 or 10 trading increments, 10 minutes to move
    the market in an orderly manner.

13
Short Sales
  • Recent concern in the US regarding unbridled
    naked short selling
  • No evidence of a problem in Canada
  • Rule 2.2 of UMIR prohibits entry of an order
    without the reasonable expectation of setting
    any trade that would result from the execution of
    the order
  • National Instrument 24-101 Institutional Trade
    Matching and Settlement

14
Short Sales
  • IIROC continues to pursue proposed amendments on
    Short Sales and Failed Trades including
  • Repeal of all price restrictions on short
    selling
  • Repeal of requirement to file short position
    reports
  • Introduction of a provision which would allow
    IIROC to designate particular securities as
    ineligible for short sales and
  • Introduction of a requirement to file a report
    with IIROC in respect of extended failed trades
    (which have not been resolved within 10 days
    following original settlement date)

15
Regulatory Marker Correction System
  • Ensure accurate audit trail
  • Replaces informal e-mail notifications
  • Facilitates the correction of
  • Insider and Significant Shareholder Statistics
    and
  • Short Sale Summary

16
Regulatory Marker Correction System
  • Report is order rather than trade based (due
    to multiple executions from a single order)
  • Corrections for bundled orders may have a
    timestamp of 1600
  • Bundled client/inventory orders can be unbundled
    when allocations are determined
  • Corrections from unbundling insider,
    significant shareholder and short sales must be
    provided by end of trading day
  • Other corrections may be submitted when detected

17
Supervision of Algorithmic Trading
  • Market Integrity Notice 2008-003 Guidance
    Supervision of Algorithmic Trading (January 18,
    2008)
  • Reminds Participants of the need for extra
    diligence when dealing with proprietary and third
    party algo machines
  • Participants must be aware if DMA clients are
    employing algo machines
  • IIROC may not be able to cancel or vary trades
    resulting from malfunctioning algos

18
Supervision of Algorithmic Trading
  • Trades in securities inter-listed with markets
    outside Canada may stand regardless of price or
    volume
  • Participants must have the ability to kill a
    malfunctioning algo machine
  • Regulatory intervention after the malfunction
    is not a substitute for thorough testing

19
In the Crossfire of Change
  • Questions?

20
Thank you for attending IIROC Tips for Traders
  • In the Crossfire of Change
  • Canadian Security Traders Association
  • Deerhurst, Saturday, August 16, 2008
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