The exponential growth of activity on Canada’s equity marketplaces has the country’s national self-regulator grasping to keep up and ensure adequate oversight.
Susan Wolburgh Jenah, president and chief executive officer of the Investment Industry Regulatory Organization of Canada, said Tuesday at the Canadian Corporate Counsel Association meeting in Montreal that it’s clear technological advancements have led to faster and more complex trading.
Four years ago, 10 million messages — quotes, orders, trades, and cancels — flowed through the Canadian markets each day. The order-to-trade ratio at that time stood at about two to one.
Now, 90 million messages make their way through the system each day, with the order-to-trade ration skyrocketing as high as 50 to one. Some forecasters expect that volume to rise by next year to 400 million daily messages.
Wolburgh Jenah pointed to algorithmic trading programs and high frequency trading for this “explosion,” and it seems IIROC’s surveillance systems may be struggling to manage the rapid change.
“Speed matters, as it always has,” she said. “But now latency is measured in milliseconds.”
Wolburgh Jenah said the challenge for regulators like IIROC — which oversees all investment dealers and trading activity on debt and equity markets in Canada — is to make way for innovation and competition at the same time as making sure policies and rules support “clear, accessible, and open markets.”
The organization hopes to do so by building a new surveillance platform that would allow it to monitor all equity multiple marketplaces at the same time, creating what she called a “virtual multi-marketplace.”
“This major technology initiative will allow us to more efficiently, and more cost-effectively, conduct surveillance,” she said, without elaborating on the new system.
Wolburgh Jenah previously served as president of the Investment Dealers Association of Canada from June 2007 until it merged with Market Regulation Services Inc. in June 2008. Before that, she was vice chairwoman of the Ontario Securities Commission from 2004 to 2007, and acting chairwoman of the commission from July to November 2005. Her remarks came Tuesday during a keynote address at the CCCA’s spring conference.
During the rare speech, she reflected on recent global economic turmoil, citing the sub-prime mortgage crisis in the United States, institutional failures such as Lehman Brothers and AIG, and frauds and Ponzi schemes such as that involving Bernard Madoff.
“We’ve been living through a period of unprecedented market turmoil,” she said. “It’s been described as a liquidity crisis, credit crisis, and fundamentally a crisis of confidence. Investors, as well as industry participants, have experienced significant market volatility, losses, and uncertainty.”
At the same time, she noted, regulators and governments across the globe have been quick to respond to these failures and prop up the system, which Wolburgh Jenah called “dangerously undercapitalized and over-leveraged.” While pundits have praised Canada’s comparative strength throughout the crisis, she said the country’s investment industry must nonetheless take some important lessons from the downturn.
One of those lessons may surround the hard line IIROC will likely take during periods of economic turmoil. Wolburgh Jenah reported that the organization investigated over 100 complaints from retail investors last year. It also increased its regular monitoring of trading activities.
“Our market surveillance staff paid special attention to any signs of potential price or market manipulation,” she said.
IIROC also ramped up its surveillance of short-sale activity. Wolburgh Jenah noted that many within the industry blamed short sellers for the downfall of firms such as Lehman Brothers, and scenarios that put others at risk of collapse. Those concerns prompted the United Kingdom Financial Services Authority and U.S. Securities and Exchange Commission to introduce general short-sale bans. At the same time, the Canadian Securities Administrators issued a short-sale ban on financial sector issuers that were inter-listed between exchanges in Canada and the U.S.
Wolburgh Jenah said IIROC regularly monitors short selling, and reported that it represents about 30 per cent of trading activity. However, one study by the organization revealed that the Canadian marketplace had not faced significant issues with abusive short selling. To the contrary, the study revealed that a short sale had a lower probability of failure than a regular trade.
“Overall, fewer than one per cent of all trades failed to close, and the vast majority of these failures were due to administrative failures,” she said.