The Challenges with Cross-Border Trade

Interview with Wendy Rudd, SVP, Market Regulation and Policy at Investment Industry Regulatory Organization of Canada.

Wendy Rudd is responsible for the management of all of IIROC’s market-related activities, including market policy, trading conduct compliance, market surveillance, and trading review and analysis. With extensive knowledge and experience in the field of equity market structure and electronic trading, Ms. Rudd has been a dedicated securities industry executive for more than 20 years.

Insider trading is a problem that appears to be epidemic in the capital markets currently. The incoming Dodd Frank regulation is changing the face of the industry and its implications for trade will have a direct impact on trade surveillance and monitoring. From a trade surveillance perspective, high frequency trading (HFT) and algo trading are causing the biggest concerns in the market at the moment. Institutions need to understand how to keep up to speed within the regulations and where the investments need to be made.

Wendy Rudd answered a series of questions written by GFMI before the forthcoming Trade Surveillance and Monitoring Conference, April 11-12, 2013 in New York, NY. Ms. Rudd shares her thoughts below on the Canadian approach to trade surveillance and monitoring.

What are the key challenges that trade surveillance and monitoring teams are currently facing?

Today’s fast-paced, ever-changing trading environment requires a very dynamic and flexible approach to regulation at all levels. Surveillance teams in particular need to stay abreast of new strategies used by market participants. Our goal at IIROC is to accomplish that, in part, through frequent dialogue with a broad range of industry practitioners. All regulators play a vital role in fostering investor confidence, which in turn contributes to healthy, competitive capital markets. To do that, we also need the right tools and technology to identify problems and enforce our rules. We will continue to invest in people and technology in order to discharge our regulatory mandate while remaining vigilant in how we allocate regulatory resources.

What sets the Canadian approach to trade surveillance apart from that of the US?

We implemented our innovative Surveillance Technology Enhancement Platform (STEP) in 2010 at a time when the Canadian markets were in the early stages of proliferating. As such, we were able to establish a single system that monitors all order and trade activity across all Canadian markets; both dark and lit. STEP puts IIROC’s “finger on the pulse” of the markets by providing us with a consolidated view of the Canadian equity market in real time. We are also in the final stages of implementing our new “Equity Data Warehouse” with the rich data, including confidential regulatory information not available on the public feeds that is provided to STEP by every Canadian marketplace. This comprehensive repository of orders, quotes and trades, combined with sophisticated data mining tools and a skilled Analytics team, will enable IIROC to monitor for trends as they emerge, and will give us greater ability to see true behaviors down to a much more “granular” level.

How can high frequency trading be monitored by regulators?

As message traffic explodes, highly automated trading strategies cannot be monitored manually. Use of sophisticated technology is the only way to sort through the noise to accurately detect patterns and rule violations; we have to “fight fire with fire”. However not all monitoring needs to be done in real time. Events that could require regulatory intervention, such as unusual price movements, require real-time surveillance. But many surveillance activities, monitoring for layering or spoofing, for example, are best conducted on a post-trade basis, when patterns can be seen across users, stocks or days and technology is no less important for post- trade monitoring; sophisticated data mining and analytics tools are a must.

Do you see high frequency trading as a positive progression for the industry?

As regulators, our job is to be objective and fair. IIROC recently issued guidance on manipulative and deceptive trading, in which we stressed that “while market abuse may be facilitated as a result of technological developments, it is the abusive nature of the practice, not the means through which the practice is conducted, that produces deleterious impacts to market integrity”. In some respects, HFT is not entirely new. Rather, many see it simply as the use of advanced technology to apply and expand on long-standing proprietary trading practices. To that end, constructive market intermediation is an important ingredient for healthy, balanced markets. But as we stated in our recent guidance, market abuse may also be facilitated by technology. Our goal is to objectively sort through the positive and negative behaviors of all market participants conducting “high frequency” trading, whether dealers or clients. Our “HOT Study”, which was published in December 2012, and the forthcoming third phase of our study of HFT, will play a key part in that effort.