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RS and Market Surveillance Rotman School of Business October 13, 2005. Universal Market Integrity Rules (UMIR). Common set of rules that govern equities trading in Canada Prevention of violations Powers of enforcement. Our History. Began on March 1, 2002

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RS and Market Surveillance

Rotman School of Business

October 13, 2005


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Universal Market Integrity Rules (UMIR)

  • Common set of rules that govern equities trading in Canada

  • Prevention of violations

  • Powers of enforcement


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Our History

  • Began on March 1, 2002

  • Prior to RS, exchanges regulated themselves

  • Two major changes in exchange structure:

    • Demutualization of the Toronto Stock Exchange, that bought junior exchange

    • Emergence of Alternative Trading System


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Not-for-profit Self-Regulatory Organization

  • Revenues: regulation fees charged to Participant Organizations and from marketplaces

  • Toronto and Vancouver


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Securities Regulation in Canada

Recognizing Commissions Delegated powers under securities legislations and recognition orders

Exchanges and ATSs

SROs

Market Regulation

MX

NasdaqCanada

TSX

MFDA

(BC, AB, SK, ON)

IDA

(BC, AB, SK, ON, QB)

RS

(BC, AB, MB, ON, PQ )

TSX Venture

CNQ

Trade Association

Member Regulation

Bloomberg Tradebook Canada

CIPF

MSI


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RS – Operations

Complaints

Closed

Trading Review

& Analysis

Market Supervision

Enforcement

Action

Preliminary

Investigation

Real-Time

Market Monitoring

Investigation

Trade Desk

Reviews

Securities Acts and other Regulatory Violations By Non-Regulated Person

Referred to Provincial Securities Commissions and/or Self-Regulatory Organizations

Closed


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Surveillance Functions

  • Administering Timely Disclosure Policy

  • Reviewing Trading Patterns

  • Forwarding suspect trading situations for investigation

  • Reversing trades where necessary


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Timely Disclosure

  • Equal access to accurate and timely information for all

  • Notified prior to release of all material news items (i.e. stock splits, major acquisitions, take-over bids, large equity financings)

  • Decision made whether or not to halt trading

  • Listed company releases news to full-text wire service


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Trading Volumes

  • 34 million transactions

  • 60 billion shares traded

  • $705 billion in value


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Trade Desk Reviews

  • On-site Compliance Audits

  • TSX & TSXV firms

  • Universal Market Integrity Rules

  • Supervision Policy


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Market Supervision

Investing Public

Participating Organizations

Other Exchanges and Commissions

Listed Companies

TSX/TSXV departments/divisions

Trading Review & Analysis


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Types of Investigations

  • Insider Trading

  • Manipulative Trading

    • includes high closing

  • Trading Infractions

  • Complaints


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Investigations

  • Contraventions of Universal Market Integrity Rules/Market Specific Rules

  • Joint investigations with the IDA/Commissions/Police


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Enforcement - Sanctions

  • New Sanction Guidelines introduced

    – September 25, 2002

  • Reprimand

  • Fine - maximum

  • Suspension or restriction of access

  • Impositions of any terms and conditions

    (e.g., further training)

  • Revocation of access

  • Interim orders


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Alliances

  • Securities Enforcement Review Committee (SERC)

  • Joint Agency Intelligence Liaison Committee (JAIL)

  • Integrated Market Enforcement Teams (IMET)

  • Criminal Intelligence Services - Ontario (CISO)

  • Inter-Market Surveillance Group (ISG)


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New Initiatives

  • Focus on Risk

  • Strategic Review of UMIR

  • Data Mining

  • Post-Trade Analytics

  • TREATS (electronic audit trail)



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Real Time Investor Protection

  • Our Key Processes:

    • Administration of timely disclosure policy (Issuer Regulation)

    • Reviewing trading patterns (Investor Regulation)

  • Outcome:

    • Forwarding suspect trading situations to Investigations & Analysis


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Timely Disclosure

  • Cornerstone policy of TSX

  • Equal access to information for all

  • Deals with material news items (i.e. stock splits, major acquisitions, take-over bids, large equity financings)


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Timely Disclosure

  • Policy covers material disclosure but process includes all disclosure by press release

  • Pre-notification to RS, followed by draft

  • Feedback from RS

  • Coordination of trading halts

  • Monitoring for dissemination including indicated opening price

  • Resumption of trading


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Disclosure Problems

  • Selective disclosure

  • Failure to advise Market Surveillance

  • Delaying press releases or not disclosing negative news

  • Inability to reach senior officials

  • Press releases issued by third party (Investor Relations)


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Monitoring the Market

  • Market monitored on an on-line basis throughout the day

  • Statistical and rule-based alerts

  • Access to Trading Engine

  • Other internal and external databases


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Monitoring the Market

Statistical alerts

  • Primarily for disclosure problems and illegal insider trading

  • Up to 16 algorithms

  • Price/volume exceptions, inter and intra-day, trade gap

  • Order rate and trade rate


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Monitoring the Market

Rule-Based alerts

  • Primarily to enforce UMIR (Trading) Rules

  • Market Stabilization

  • Customer Principal Trading

  • Order Markers

  • Specialty Trades

  • Front running


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Referrals to Investigations & Analysis

  • Possible insider trading

  • Manipulation incl. high/low closing, spoofing

  • Specific trading rule violations incl. front running, illegal short sale, CPT, market stabilization, best execution, client priority


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Market Surveillance Software

IMM - Intelligent Market Monitor - Alerts


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Market Surveillance Software

IMM - Alert Details



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Market Surveillance Software

MaDCAT-Market Data Collection & Analysis Tool



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Market Surveillance Software

Confidential Previous Trades Display


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Market Surveillance Software

Consolidated Short Position Report


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Market Surveillance Software

ROC - Record Of Contact


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Market Surveillance Software

SMARS Rule Based Alerts – Market Stabilization Monitor



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Conclusion estimates

Questions?


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