The Investment Industry Association of Canada (IIAC) took the unusual step today of wading into the debate over the merits of high-frequency trading (HFT) by releasing a letter arguing that fundamental differences between Canadian and U.S. equity markets suggest that the Canadian market is less vulnerable to some of the unfair practices that may afflict U.S. markets.

The IIAC published a letter Monday from its president and CEO, Ian Russell, to industry executives, which highlights the role of the book Flash Boys, by Michael Lewis, in bringing the long-running debate over the impact of electronic trading to wider public attention. It notes that the emergence of HFT “has raised concerns about inherent fairness among investors in equity markets, and whether regulatory intervention is appropriate.” However, it says that since the publication of Flash Boys and its contention that the markets are essentially “rigged”, these deliberations have since replaced by emotional rhetoric.

“As a starting point, let me state categorically that the Canadian equity markets are definitely not ‘rigged’,” Russell stresses in his letter. Indeed, he maintains that the issues raised in the book primarily relate to the U.S. markets. While Canadian equity markets have seen the emergence of new trading venues, strategies, and technology, Russell argues that these changes have come more slowly to the Canadian markets, accompanied by “carefully crafted rules and regulations to protect investors, and ensure fairness and integrity of markets.”

These rules are often informed by developments in the U.S. markets, he notes, resulting in “a vastly different market structure and correspondingly different investor behaviour in Canada.”

For example, Russell says that as much as half of U.S. trading volume may be executed in dark pools, compared with about 10% in Canada, due to tougher rules on this sort of trading in Canada. He also says that payment for order flow is not a feature of the Canadian market like it is in the U.S.

That said, he concedes that there are practices in Canada that may raise policy concerns. “Like their peers to the south, Canadian regulators continue to examine the impact on market integrity and market quality of issues such as co-location, maker-taker fees, the proliferation of order types and faster access to market data to certain subscribers,” the letter says.

To that end, he notes that Canadian regulators are taking a cautious, data-driven approach to these issues. Recently, the Canadian Securities Administrators (CSA) published proposed changes to the order protection rule (OPR) along with plans to examine maker-taker models and market data fees, among other things. Additionally, the Investment Industry Regulatory Organization of Canada (IIROC) is currently engaged in an extensive study of the impact of HFT on Canadian markets.

“This rigorous approach to regulation will largely mitigate the risk that existing abusive practices now under scrutiny in the U.S. will become widespread in Canada,” he says, adding that the IIAC and firms “will continue to support and cooperate with regulators in identifying improper market behaviour and ensure that our markets remain efficient, competitive and fair.”