Electronic trading and brokerage services provider, Instinet Canada Limited, will pay a fine, plus costs after an Investment Industry Regulatory Organization of Canada (IIROC) hearing panel accepted a settlement agreement with the company for failing to comply with its trading supervision obligations.
“Instinet Canada Limited admitted that it failed to comply with its trading supervision obligations to prevent and detect potentially manipulative and deceptive trading activities by one of its direct electronic access clients,” IIROC wrote in its statement released June 17.
IIROC’s universal market integrity rules (UMIR) “require a participant to develop and implement policies and procedures that are reasonably well designed to ensure that orders entered on a marketplace are not part of a manipulative or deceptive method, act or practice, nor an attempt to create an artificial price or a false or misleading appearance of trading activity or interest on the purchase or sale of a security,” IIROC writes in its settlement agreement with Instinet. “Quote manipulation is a manipulative trading practice whereby orders are entered with no intention that they be executed in order to temporarily manipulate the price of a security in order to secure a price advantage to the detriment of other market participants. This manipulative trading practice disrupts and distorts the genuine price formation process of the marketplace.”
IIROC’s trading conduct compliance (TCC) staff first noticed perceived deficiencies in Instinet’s supervision of potential quote manipulation in December 2014. In January 2015 the company said it was planning to enhance internal compliance. Months later, in October 2015 the company told IIROC that in-house development of its monitoring system was progressing at a very slow pace. January 2017 Instinet advised TCC that it would be adding to or modifying its internal monitoring and testing procedures, including those for quote manipulation. March 2017 it was still reviewing an internal system for monitoring and testing. October 2017, IIROC staff referred the matter to enforcement.
In December 2017 when enforcement staff notified Instinet about its concerns related to the quote manipulation alerts generated by the company’s client, Instinet took corrective measures that significantly reduced the number of quote manipulation alerts that occurred. Although IIROC’s surveillance system discovered a number of high and very high alerts generated by Instinet’s client that the company’s compliance practices didn’t identify, IIROC says “the potential quote manipulation alerts triggered in the IIROC surveillance system related to a very small percentage of the overall trading volume undertaken by the respondent’s client in the dark market and concerned only a limited number of the client’s trader IDs.”
In addition to paying a fine of $155,000 and costs totaling $15,000, Instinet agrees it will implement remedial measures and provide a report to IIROC outlining the implementation and adoption dates of the remedial measures within six months.
