Investment dealer fined $155,000 for trading supervision shortfalls

IIROC investigation of 2.9 million dark trades reveals potential missed quote manipulation alerts

Investment dealer fined $155,000 for trading supervision shortfalls

The Investment Industry Regulatory Organization of Canada (IIROC) has accepted a settlement agreement, with sanctions, with a dealer that failed to detect and prevent potential manipulative activities by one of its direct electronic access clients.

In a settlement agreement dated June 3, IIROC said that Instinet Canada Limited, an investment dealer and participant under UMIR, failed to satisfy its obligations to prevent and detect potential contraventions of UMIR 2.2 and UMIR Policy 2.2. committed by one of its direct electronic access clients between January 2017 and February 2018.

“In particular, orders were entered on visible IIROC – regulated marketplaces that changed the best bid price or best ask price and affected the price at which trades would occur with orders posted in marketplaces where orders are not visible to marketplace participants,” IIROC said.

The perceived deficiencies in Instinet’s supervision were first noted in a December 2014 review by IIROC Trading Conduct Compliance (TCC) staff, which warned of potential quote manipulation. On January 22, 2015, Instinet said it was planning to enhance its internal compliance surveillance system to monitor for and detect quote manipulation activities.

For two years after that, IIROC continued to contact Instinet about repeat deficiencies in its trading supervision practices, at one point asking the dealer to provide a timeline for its proposed additions and modifications. Instinet repeatedly said that it was developing its monitoring system in-house, as it was not satisfied with the alerts available from third-party compliance monitoring system providers.

In May 2017, IIROC’s Trade Review & Analysis (TR&A) unit asked Instinet if it had identified certain instances of potential quote manipulation through trading activity conducted at various points in 2016, to which the firm said no. After TR&A asked for its quote manipulation policies and procedures, Instinet confirmed several details, including the fact that it supervised for quote manipulation manually by randomly selecting 25 trades executed on the dark market for each calendar quarter.

TR&A referred Instinet’s case to IIROC enforcement staff. It found that based on IIROC’s surveillance system, approximately 500 High and Very High Alert trades had been generated in 2016 by one of Instinet’s clients on trading volume of well over one billion shares in the dark market. Between January and August 2017, the client generated approximately 2,500 such alerts based on dark-market trading volume of around 1.07 billion shares; IIROC detected more than 2,000 more alerts in the succeeding months up to December 2017.

IIROC’s Enforcement Staff told Instinet of its concerns on the potential quote manipulation alerts in early December 2017. The firm then asked its client to issue a notice to its traders advising them of certain prohibitions on trading practices in Canada, and altered its order routing protocol to prevent orders from being exposed to the dark market on the way to lit markets, which significantly reduced the number of potential quote manipulation alerts.

Instinet also developed a new alert for potential quote manipulation in 2018, which it’s trying to supplement with the help of third-party vendors.

Instinet has agreed to pay IIROC a fine of $155,000 and costs of $15,000. It’s also agreed to implement remedial measures and submit a report on the implementation and adoption date of the remedial measures within six months.


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