RS survey outlines top market integrity risks

Date: Monday, October 25, 2004

Insider trading seen as risk most likely to occur- A survey of Canadian equity trading practices by Market Regulation Services Inc. (RS) finds that manipulative trading, insider trading, front running, and failing to deliver best execution are the top four risks. The results come from a survey conducted this spring, involving dealers that are subject to the Universal Market Integrity Rules, other dealers, so-called “access persons”, and buy-side firms. They were asked to identify the highest risks to market integrity in terms of likelihood, impact and trend. RS says that the results were generally consistent between market participants and non-participants. The only area of significant divergence was in the area of ‘best execution’ where participants were of the view that this risk was occurring infrequently while non-participants ranked it second highest. Overall, respondents said that these risks are either stable or decreasing. Client principal trading, short sales, trading during distribution, and restricted person trading during a bid were ranked lower in the survey. The lowest-rated risks were order exposure, trade not on a marketplace, and order entry. Almost all firms indicated that they had internal controls, both electronic and/or manual, that are reasonably designed to address these market integrity risks. Many respondents cited training and education as important to managing risk. Both participants and non-participants view insider trading as occurring frequently and as the market integrity risk mostly likely to occur, with the highest impact to market integrity/investor confidence. Both participants and non-participants view frontrunning as the third most likely market integrity risk to occur, with the second highest impact. The survey notes that some firms appear to focus on high closing at month end as the only indicator of manipulative trading. In fact, there are many other methods of manipulative trading. RS reminds firms that they should be monitoring indications of manipulative trading activities other than high closing, including: upticking/downticking/price maintenance; uneconomic trading; match or wash trading, spoofing (orders not intended to be executed); market dominance; and using trading methods such as anonymous markers or jitney orders for deceptive trading purposes. As for best execution, RS says that some firms appear to believe that this risk is unlikely to occur because their reputations are at stake and it is the preservation of such reputation with clients that ensures compliance with trading rules. RS says it is considering the results of the survey in its design and implementation of an enterprise risk-based approach to regulation. http://docs.rs.ca/ArticleFile.asp?Instance=100&ID=018F38AABEC148E9BE816D3B3ABC9A71 -By James Langton