Predatory Trading Rules Considered in Canada

The Ontario Securities Commission may consider measures to regulate high-frequency trading if evidence of predatory activity is found as it reviews its market-structure policies, Chairman Howard Wetston said.

“The important question for us is, is our market fair?” Wetston said during an interview yesterday in Madrid. “We are presently doing a major review of our market structure rules. If we conclude that the market is unfair, there is a duty on our part to consider that.”

Canadian securities regulators are investigating high-frequency trading, a catch-all term for automated buying and selling at paces far faster than humans can perceive. The practice, which provides the majority of liquidity in some markets, has come under increased scrutiny in the U.S. this year, with attention accelerating following the publication of Michael Lewis’s “Flash Boys” in March.

The book argues that high-speed traders, exchanges and broker-dealers have rigged the stock market, an allegation denied by many including the head of the U.S. Securities and Exchange Commission.

The Ontario Securities Commission, which regulates securities trading in the province, is awaiting the results of a study from the Investment Industry Regulatory Organization of Canada investigating the impact of high-frequency trading practices on the Canadian market. IIROC said May 27 it commissioned the third phase of a study on the impact of trading driven by computer algorithms. The study will assess whether those practices are hurting the quality of the market, Wetston said.

U.S. Review

“Once we have the analysis, we will take a step back and determine in Canada how it is affecting our markets,” Wetston said during yesterday’s interview in the headquarters of the International Organization of Securities Commissions, where he is vice chairman.

His counterpart at the U.S. SEC, Mary Jo White, on June 6 revealed the commission’s most sweeping plan yet for regulating high-frequency trading and monitoring dark pools and other secretive trading practices in the world’s largest equity market. Among the recommendations, proprietary traders who use computers to buy and sell stocks in milliseconds would have to register with the SEC.

The Ontario regulator, alongside its provincial peers, also introduced on May 15 proposed changes to rules related to the order protection rule, designed to make sure traders get the best price in the market.

‘Unnecessary Intervention’

“Excessive maker-taker pricing models are behind many of the issues with our market today, and in particular have resulted in high levels of unnecessary intervention by some high-frequency traders,” said Evan Young, head of electronic execution services at Bank of Nova Scotia, in a June 10 report.

Solutions to the potentially predatory aspects of high-frequency trading will come from both regulators and within the industry, Wetston said.

Brad Katsuyama, a former Royal Bank of Canada trader and the protagonist of “Flash Boys,” founded the upstart IEX Group Inc. as an alternative stock market in the U.S. It was designed to eliminate purportedly unfair speed advantages of HFT firms.

In Canada, Aequitas Innovations Inc.’s proposed exchange aims to do the same. Aequitas was founded by group including Royal Bank, Barclays Plc, and Public Sector Pension Investment Board.

‘Viscous Circle’

“There is a fundamental distrust towards the financial industry and a widespread belief that stock markets are stacked against investors,” Jos Schmitt, chief executive officer of Aequitas, said in a June 2 speech in Toronto. “We are in a vicious circle that needs to be halted, but without negatively impacting the benefits of high-frequency trading. This is not about bad apples but about changing the way things work.”

The Ontario Securities Commission in January rejected Aequitas’s initial application to create an exchange, saying its business model ran afoul of regulations stipulating all traders get equal access to orders. Aequitas has revised its application to address those concerns while still blunting high-frequency traders’ advantages.

“It’s very much alive, and going ahead before our commission and likely we’ll see some public activity over the next month or so,” Wetston said of the Aequitas request.

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