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Canadian Regulator: No Additional Regulatory Response Necessary for HFT

The Investment Industry Regulatory Organization of Canada (IIROC) announced recently that it had completed a study of the effect of high-frequency trading on Canadian equity markets. The study did not find “any concerns that warranted a regulatory response beyond measures already implemented.” The general findings were that:

  • HFTs generally provide more liquidity.
  • HFT liquidity provision can be significantly lower when a large trade is considered stressful – that is, when the volume of a large trade represents a higher than normal percentage of all trading volume on the day.
  • 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.)

IIROC noted that a few academic papers examined in the study “indicated that the trading activity of HFTs has resulted in increased costs for both institutional and retail clients,” but “on balance IIROC believes that the benefits outweigh the costs.”

The Canadian regulator’s stance is contrasted by the SEC’s move earlier this year to propose amendments that would close an exemption that currently allows many high-frequency traders to avoid registration with FINRA. Comments for that proposal were due June 1, but the SEC has yet to finalize the rule.