Canada Proposes New E-Trading Rules
April 11, 2011
The Canadian Securities Administrators, the umbrella organization for Canada’s securities regulators, has proposed new rules designed to establish a regulatory framework for electronic trading, including high-frequency trading, algorithmic trading and direct market access.
Comments on the proposed rules issued on April 8 are due by July 8.
If adopted, the proposed rules, known as ‘National Instrument 23-103: Electronic trading and direct electronic access to marketplaces’, would require Canadian broker dealers to maintain appropriate controls, policies and procedures to monitor direct electronic access (DEA) to markets by their clients as well as their own electronic trading.
“In establishing the risk management and supervisory controls, policies and procedures, a marketplace participant must: ensure all order flow is monitored, including automated pre-trade controls and regulator post-trade monitoring that are designed to systematically limit financial exposure and ensure compliance with marketplace and regulatory requirements; have direct and exclusive control over the controls, policies and procedures; and regularly assess and document the adequacy and effectiveness of the controls, policies and procedures,” wrote the CSA.
The CSA wants dealers to set up standards their clients must meet before providing them with DEA. Those standards must include that the client has appropriate financial resources; knowledge and proficiency in the use of the order entry system; knowledge of and the ability to comply with all applicable marketplace and regulatory requirements and adequate arrangements to monitor the entry of orders through DEA.
The CSA gave broker-dealers procedures to prevent either erroneous orders or those that exceed pre-determined credit or capital thresholds.
The CSA also wants market operators – exchanges and alternative trading systems – to take an active role in managing the risks associated with electronic trading and DEA.
Marketplaces must provide a participant with” reasonable access to its order and trade information on an immediate basis; ensure that systems can support the use of DEA client identifiers; ensure that they have the ability and authority to terminate all or a portion of the access provided to a marketplace participant or DEA client; regularly access and document whether they require any risk management and supervisory controls; policies and procedures to ensure fair and orderly trading; ensure that they can access and document the adequacy and effectiveness of any risk management and supervisory controls, policies and procedures they implement," the CSA wrote, adding that marketplaces should also cancel or correct clearly erroneous trades.
In 2007, the CSA published for comment trading rule amendments that aimed to address issues associated with direct market access. Those amendments were never implemented, and the proposed new rule would expand on those amendments to regulate electronic trading in general.
“A national policy for Canada is long overdue,” says Wendy Rudd, a partner with financial services consultancy Capco in Toronto, who specializes in electronic trading issues. “So far there have been few limits on direct market access in Canada as most marketplaces have relied on a policy adopted by the Toronto Stock Exchange over two decades ago when algorithmic and high-frequency trading didn’t exist.”
What the CSA now wants is for broker-dealers rather than their institutional clients to be responsible for pre-trade credit and liquidity limits. “Such a requirement will mean that some broker-dealers will have to adapt their order management and other systems to provide more robust filtering and risk-parameters,” says Rudd.
