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The Investment Industry Regulatory Organization of Canada (IIROC) today announced completion of its comprehensive, multi-phase study of High Frequency Trading (HFT) and its impact on Canadian equity markets.
The results of the study did not reveal any concerns that warranted a regulatory response beyond measures already implemented by IIROC and indicate that the presence of HFT has different, mostly positive impacts on Canadian equity markets and those who invest on those markets. General findings include:
- HFTs generally provide more liquidity.
- HFTs contribute substantially to price discovery.
- The majority of passive orders entered by HFT either improve the best price or match the prevailing best prices.
- There is little evidence that HFTS take advantage of slower non-HFTs or front-run non-HFTs. (Front-running occurs when a market participant makes a non-client transaction that may affect a security's market price before filling a client order for that security.)
"Our HFT research demonstrates how IIROC uses empirical information and objective analysis to inform policy development," said Victoria Pinnington, IIROC Senior Vice-President of Market Regulation. "As a public interest regulator, it was important to conduct comprehensive research to help us all better understand HFT and its effects on Canadian market."
The HFT study was designed to complement other initiatives already adopted by IIROC to govern high frequency and algorithmic trading, such as implementation of Electronic Trading Rules and requirements respecting third-party electronic access to marketplaces, as well as the issuance of guidance relating to manipulative and deceptive practices.
IIROC will continue to be proactive in strengthening its oversight and regulation of trading, including developments relating to HFT.
About the HFT Study:
In the first two stages of the three-phase HFT study, IIROC identified and examined the activity of a group of traders responsible for a high number of orders, compared to the number of trades they actually completed over a specific period of time – a characteristic commonly associated with HFT activity – and conducted a detailed analysis of this study group's trading activity on Canadian equity marketplaces. This High Order-to-Trade (HOT) study was published by IIROC in December 2012.
In the third and final phase of the study, five independent academic teams selected by IIROC examined the impact of HFT on the Canadian equity marketplace. The academic papers were discussed at a public forum this fall, hosted by IIROC with the Capital Markets Institute at the Rotman School of Management at theUniversity of Toronto. A video recording of the HFT Forum, along with the academic papers and all other IIROC publications related to the study are available on the IIROC website.
