High Frequency Trading Is Shrinking In Canada
High frequency trading is shrinking in Canada and our neighbors to the north are once again proving they are way ahead of us when it comes to analyzing this activity. The Canadian regulator, IIROC, just published the interim results of their ongoing HOT study (HOT stands for high order-to-trade activity). According to IIROC,
“The HOT Study objectively identifies a study group of traders and offers a detailed, statistical analysis of their activity. The study focuses on the activity of traders who were responsible for a high number of orders, compared to the number of trades they actually completed.”
HOT activity for the period January 2012–June 2013 has declined significantly from the levels originally reported in the HOT Study for the period August–October 2011 (22% of volume, 32% of value, 42% of trades). The new figures are 16% of volume, 24% of value, and 34% of trades.
These results beg the question: why is HFT shrinking in Canada?
There appears to be two reasons for the decline:
1- In October 2012, IIROC rolled out new rules for dark pool trading. Before orders could trade in the dark, lit orders at the same price would have to trade. Also, for smaller orders to trade with a dark order, there needs to be “meaningful price improvement”. These new dark pool rules have severely reduced the percentage of trades that occur in the dark in Canada. For TSX listed shares, dark pool volume was cut in half since the new rules (from 10% to 5%). More importantly, the percentage of trading that was done by HFT’s in the dark on TSX-listed stocks dropped from 30% to 10% (see above chart). The new dark pool trading rules seem to have stopped many of the latency arbitrage games that the HFT’s were so used to playing.
2- In April 2012, IIROC implemented a new fee structure which would charge dealers based on their share of messages processed by IIROC’s surveillance system. IIROC estimated that 85% of firms saw a decrease in fees while 15% saw an increase. Essentially, HFT’s were now being charged more since they were sending more messages that needed to be processed by IIROC.
While US regulators struggle with the issue of what to do about HFT, IIROC has managed to significantly reduce HFT’s presence by implementing two rules which have leveled the playing field in their market. While we are jealous of our friends to the north, we are also hopeful that we will be catching up to them soon. The FT reported yesterday that US exchanges and banks were discussing a new proposal to limit dark pool trading. The FT said the proposal would require “brokers to offer public markets their best available price to buy or sell a stock before they could trade that price at off-exchange venues.”
We hope that our regulators look at the blueprint that the Canadian regulators have been preparing for the past few years and realize that to fix our markets we don’t need a major overhaul to the rules or a multi-year holistic review of the equity market. Just a few small changes may do the trick.