A hearing panel of the Investment Industry Regulatory Organization of Canada (IIROC) announced it has accepted a settlement agreement, with sanctions, between IIROC staff and BMO Nesbitt Burns Inc.
Under the agreement, BMO Nesbitt Burns will pay a $50,000 fine and costs of $5,000 for its role in allowing a registered representative to use an order execution procedure that was contrary to Universal Market Integrity Rules.
Between September 2014 and March 2016, the company approved and permitted an order execution procedure which resulted in some retail client orders being accumulated over a one-hour period before they were entered on a marketplace, contrary to the market integrity rules known as the Order Exposure Rule. The rule is requires that all client orders for 50 standard trading units or less be immediately entered on a marketplace that displays information regarding orders in a consolidated market display. “This Order Exposure Rule is intended to support the price discovery mechanism in the Canadian market by adding liquidity in the displayed markets.”
Exceptions to the requirement include one that provides an order need not be immediately entered “if the client has specifically instructed the participant to deal otherwise with the particular order.”
According to the order, the registered representative in question had been suspended from using the company’s special handling desk to process such orders for failing to maintain a detailed list of the clients he had spoken to. After he was reinstated, the representative was required to keep an electronic spreadsheet with a detailed list of the clients he had spoken to, any time he used the special handling desk for average price trades.
“Between September 2014 and March 2016, the registered representative routine used the special handling desk to accumulate order over a one-hour period, in accordance with the average price trading policy and with the knowledge and approval of the clients and BMO Nesbitt supervisors, including his branch supervisor,” say the decision’s authors. “In some instances there were up to seven tranches of orders that were submitted in one-hour increments to the special handling desk, at a limit price, and held in the accumulation account over a period of multiple days, as permitted under the average price trading policy.”
IIROC staff say no investors were harmed as a result of the practice. In each example where staff found that an order was not immediately entered, the average price fills each client ultimately received after participating in a block order, were potentially better than the price each client could have received if their order was immediately entered and filled.
BMO has since agreed to amend its use of the average price trading policy to ensure compliance with market integrity rules in the future.
