Market data and technology company Activ Financial has expanded its risk gateway tool to cover all Canadian exchanges, ahead of new rules that will require market participants in Canada to have pre-trade risk controls in place across all asset classes from next month.
Under rule NI 23-103 Electronic Trading, market participants must establish, maintain and ensure compliance with risk management and supervisory controls that are reasonably designed to manage the financial, regulatory and other risks associated with marketplace access by 1 March at the latest. The Canadian Securities Administrators requirements include an obligation to ensure that the entry of orders “does not interfere with fair and orderly markets”, as well as the ability to immediately stop or cancel any orders, as well as suspect or terminate access to any marketplace.
The Activ Financial tool, TradeDeck, allows brokers to control pre-trade risk on all orders that enter the market, with real-time intra-day adjustment, order monitoring and a kill switch. The technology covers market data feeds, order routing and credit risk. It also has the ability to set credit controls for intraday margin calculations.
Previously, it was possible for buy-side market participants to use their broker ID to access the market without pre-trade risk controls – an arrangement sometimes referred to as ‘naked sponsored access’. However, fears about market stability have been heightened ever since the flash crash of May 2010, in which $1 trillion was briefly wiped off the value of the US stock market after an erroneous trade was entered by an asset manager using an algorithm with no regard for time or price.
“The increased speed and automation of trading on marketplaces give rise to various risks, including credit risk and market integrity risk,” said the CSA document. “In the view of the CSA, marketplace participants should bear primary responsibility for ensuring that these risks are reasonably and effectively controlled and monitored. This responsibility applies to orders that are entered electronically by the marketplace participant itself, as well as orders from clients using the participant dealer’s marketplace participant identifier.”
In the US, naked sponsored access was banned in November 2011. In Europe, pre-trade risk controls are also a requirement under the European Commission’s MiFID II legislation, which is due to take effect in 2015.