Canadian HFT Regulations: A Cautious Work in Progress

Canadian regulators continue to face significant challenges in their attempts to reconcile the benefits and challenges that accompanied the introduction of competition and high frequency trading in the Canadian equities markets in 2007. Despite the benefit of both hindsight and foresight gained from other markets such as the US, which has been wrestling with these same issues since 2001, HFT remains a regulatory work in progress.

The Investment Industry Association of Canada (IIROC) is both facilitating and impeding high frequency trading strategies as it strives to meet its mandate. To the envy of many other regulators, the trading data IIROC collects from its Surveillance Technology Enhancement Platform (STEP) has enabled it to use a more data-driven approach to policy making. Although proponents of HFT have cited enhanced liquidity, reduced spreads and greater market efficiencies, regulators are concerned about the adverse activities associated with spoofing, layering, quote stuffing, quote manipulation and abusive liquidity detection. Regulators are also concerned that increased messaging rates force market participants to spend excessive amounts of money to process and store data without a reasonable expectation of improved execution. Finally, there is concern that high order rates (even if generated by legitimate strategies) could have a negative impact on market integrity and market quality.

The introduction of HFT in the Canadian market has brought both challenges and benefits. The greatest impact of HFT can be seen in the evolution of multiple markets. Some have come and some have gone and the regulators are still trying to figure out how to fairly regulate the introduction of new markets. Another effect of its introduction is the sell side has had to change its business focus when dealing with various clients. Electronic trading has grown exponentially and the sell side has had to keep pace with technological and trading strategy changes. The consensus view, however, is that HFTs have made the markets more efficient.

In the end, IIROC has been applauded for taking a data driven approach to its rule-making rather than following in the footsteps of its global brethren who seem deadlocked in prescriptive recommendations. But the biggest challenge for IIROC going forward will be using its resources effectively. It is difficult to hire and especially problematic to retain top talent in the quest to stay ahead of fast-paced technological advancements and to try not to solve problems that do not exist. One buy side trader summed it up this way: The ease with which you can get things done is the measure of success.

This 17-page report includes 6 exhibits, and cover the major proposed and implemented regulations impacting high frequency trading in Canada including messging rates, dark pool rules, resting rates, and electronic trading rules (aka market access rules in the US).