Watchdogs to probe surge in equity trade ‘internalization’ at big banks, dealers -

Watchdogs to probe surge in equity trade ‘internalization’ at big banks, dealers

Credit: financialpost.com

  • Dec 08 2017 00:00About: 6 days ago
  • 7 views

Three Canadian market watchdogs are joining forces to scrutinize a recent rise in “internalization” of equity trading flow by large banks and dealers.

The aim is to determine whether these transactions, in which the same dealer is on both sides of the trade, disadvantage any market participants, and whether regulatory intervention is required.

There has been no suggestion that any rules are being broken, and industry sources say the regulators stepped in after growing concerns among some market players came to a head in a confrontational exchange at a conference in Toronto’s financial district last month.

According to two accounts of what transpired at the Nov. 2 conference, an exchange between a speaker from RBC Capital Markets and an official from a proprietary trading and market-making firm turned heated when the latter suggested that big banks are intentionally keeping trades within their walls at the expense of others in the market.

“Concerns among certain stakeholders” were acknowledged this week by staff of the Investment Industry Organization of Canada (IIROC) and the Canadian Securities Administrators, an umbrella group for provincial securities watchdogs, and the regulators said they are committed to digging into whether any rules need to be changed.

“In light of these concerns, and our own concerns, we are gathering information in order to understand current practices and how these activities fit into our current rule framework in order to determine what, if any, action is required to ensure that the Canadian market is not negatively impacted,” the regulators said in a joint statement.

TMX Group, the owner of the Toronto Stock Exchange, is also getting involved, and plans to hold an industry roundtable Jan. 23. Among the questions the exchange owner wants answered is whether internalized order flow provides benefits or causes harm, and to whom.

The rise of broker internalization of retail trade order flows was dubbed the “biggest story” in Canadian equity trading in a September article published in consultant Tabb Group’s Tabb Forum.

“The level of dealer trading that is the same dealer on both sides, matching on market, has grown significantly over the past few quarters,” wrote author Doug Clark, who is head of research at ITG Canada.

The percentage of orders matched by the same dealer rose by more than 10 per cent over six months, he wrote, noting that the top five internalizing firms matched themselves more than 6.5 million times on TSX-listed issuers in a single quarter.

Clark said his analysis of the data showed no evidence of anyone breaking the rules.

“Instead, we find a growing number of dealers using a variety of mechanisms to better increase the odds of trading with themselves in the market,” he wrote.

These include routing orders to venues where the dealer already has resting orders, using market-maker incentives in a sophisticated manner, and aggressively quoting names the firm is most active in. Some of the dealer behaviour suggests they are able to “anticipate slightly larger orders about to cross the spread and join the bid,” but all mechanisms used appear to adhere to rules around order exposure and systemic internalization, Clark said.

Still, he said it makes sense for regulators and practitioners to come together to determine whether there should be limits to internalization, particularly since some of the measures were put in place in an unsuccessful bid to keep trading flow on inter-listed stocks in Canada.

Andreas Park, an associate professor of finance at the University of Toronto, said the questions being asked by regulators should reveal key data on the specifics and scope of the various mechanisms used to internalize trade flow. This, in turn, can be used to measure the impact of internalization on everything from trading, to price discovery, to market function.

“This is a data question: To what extent does it happen… and what’s the harm?” said Park, who is on a committee that advises the Ontario Securities Commission on market structure.

“Just because it happened doesn’t (necessarily) mean that someone’s harmed.”

He noted that much of Canada’s financial regulation is principles based, which means the assessment is likely to consider not only whether practices breach the rules, but also whether they challenge the spirit and intention of those rules.



Follow Us on Twitter

determine whether these transactions which same dealer both sides trade cause disadvantage market participants

Related stories with Watchdogs to probe surge in equity trade ‘internalization’ at big banks, dealers

DOT drops proposal to force airlines to disclose bag fees -World News
DOT drops proposal to force airlines to disclose bag fees 6 days ago
WASHINGTON — An Obama administration proposal that would have required airlines disclose checked and carry-on bag fees at the start of a ticket purchase rather than later is being dropped by the Department of Transportation. The department said in a
Goodfood Market Corp. celebrates its first full year as a meal kit company -World News
Goodfood Market Corp. celebrates its first full year as a meal kit company 6 days ago
The idea of customers selecting the food they want based on recipes supplied by the company and then having it delivered is taking off
Toronto approves new short-term rental rules -World News
Toronto approves new short-term rental rules 6 days ago
Toronto city council has approved regulations for short-term rentals in the city that would apply to such services as Airbnb. The rules allow the rental of a principal residence only and homeowners won’t be allowed to list secondary suites, such as
Alibaba redraws retail fault lines with bricks-and-mortar push -World News
Alibaba redraws retail fault lines with bricks-and-mortar push 6 days ago
HANGZHOU, China (Reuters) - In a small village shop near the eastern Chinese city of Hangzhou, store owner Lu Qiwei uses his smartphone to place orders to refill stocks of instant noodles, rice and drinks.
Lorde’s Tweet From January Predicted the Downfall of Predatory Men in Power -World News
Lorde’s Tweet From January Predicted the Downfall of Predatory Men in Power 6 days ago
Back in January, Lorde sensed a revolution was coming. The singer, 21, tweeted a cryptic message about powerful men on January 29, writing: “These old men in power have a storm coming, the likes of which they cannot comprehend.” this came true i gu
Beyonce Hits Target for Christmas Shopping -World News
Beyonce Hits Target for Christmas Shopping 6 days ago
Beyonce let her hair down and threw on some shades, but it wasn't enough to disguise her during a Target shopping spree.
'Full House' Reunion! Ashley Olsen and Bob Saget Pose Together at Charity Event -World News
'Full House' Reunion! Ashley Olsen and Bob Saget Pose Together at Charity Event 6 days ago
A Tanner family reunion! Bob Saget and Ashley Olsen reunited at the 30th anniversary of the Scleroderma Research Foundation’s Cool Comedy – Hot Cuisine fundraising event in New York City on Tuesday, December 5. Costars Reunited!
Bitcoin flirts with $16,000, alarm bells ring louder -World News
Bitcoin flirts with $16,000, alarm bells ring louder 6 days ago
LONDON/NEW YORK (Reuters) - Bitcoin rocketed to a lifetime high just shy of $16,000 (11,922.50 pounds)on Thursday after climbing some 60 percent over one week, intensifying the debate about whether the cryptocurrency is in a bubble about to burst.
Edward Rogers, Melinda Rogers named chair, deputy chair of Rogers Communications Inc. -World News
Edward Rogers, Melinda Rogers named chair, deputy chair of Rogers Communications Inc. 6 days ago
Edward Rogers will replace long-time family friend Alan Horn, who will remain on the board
NEB rules in favour of Trans Mountain on Burnaby bylaw impasse -World News
NEB rules in favour of Trans Mountain on Burnaby bylaw impasse 6 days ago
The NEB said the company didn't have to comply with two sections of Burnaby’s bylaws related to preliminary plan approvals and to tree cutting permits
Digital currency exchange NiceHash says bitcoin worth over $60 mn hacked -World News
Digital currency exchange NiceHash says bitcoin worth over $60 mn hacked 6 days ago
Coindesk reported on Thursday that the loss is about 4,736.42 Bitcoins
Bitcoin: Growing bubble or golden investment opportunity for Indian trader? -World News
Bitcoin: Growing bubble or golden investment opportunity for Indian trader? 6 days ago
With a rise of over 1,400% this year to a level past $15,000, Bitcoin has caught the imagination of investors globally. But how safe is it to invest in the cryptocurrency? Here is all you need to know