Securities regulators have finalized rules that impose greater controls over electronic trading, but firms will have another couple of months to get their systems up to snuff.
The Investment Industry Regulatory Organization of Canada (IIROC) announced Friday that the Canadian Securities Administrators (CSA) have approved its proposed rule amendments that are designed to ensure the effective management of risks associated with electronic trading.
The amendments impose supervisory and gatekeeper responsibilities on dealers to protect against errors related to electronic trading, and harmonize its requirements with the CSA’s new rules on electronic trading. It also provides guidance relating to the supervisory requirements under the trading rules with respect to electronic trading.
Among other things, under the rules, firms will have to have appropriate automated filters, algorithm testing, and other risk management tools in place for handling orders before those orders enter the marketplace. Specifically, the rules require firms to implement automated controls that would prevent the entry of orders that exceed a pre-determined credit/capital threshold, or a pre-determined value or volume limit; and, prevents orders that violate the trading rules. They will also clarify the circumstances under which an erroneous trade can be corrected, or cancelled.
IIROC says that the changes establish another tier of controls, along with single-stock and market-wide circuit breakers, in order to manage the risks of electronic trading.
The amendments are officially effective March 1, 2013. However, in recognition of the technological changes that are required to implement these automated controls, IIROC dealers will have until May 31, 2013 to fully test and deploy their controls.
Regulators in Quebec, BC and Alberta have issued parallel orders issued a blanket order giving firms the extra time to get their systems up to snuff. The CSA notes that while the automated pre-trade risk controls are important to address the risks of electronic trading, the regulators also see risk in adopting these automated controls before they have been adequately tested.
The Ontario Securities Commission (OSC) doesn’t have the ability to issue a blanket order. Instead, it says that it is not in the public interest to pursue an enforcement action for failure to fully implement controls, as long as firms have begun testing by March 1, and fully implements them by May 31.
“The revised rules will help to bolster market integrity by ensuring that electronic trading risks are mitigated through appropriate controls for all trading activity, regardless of source,” said Susan Wolburgh Jenah, IIROC’s president and CEO.