Watchdogs to probe trading practices of big banks, dealers
TORONTO 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.