Thank you for your email referencing algorithmic trading and the impact on Canadian exchanges.
Algorithmic trading is a legal, automated order generation system for the purchase and sale of securities based on certain parameters which have been established by the holder of the account. The orders entered by an algorithmic trading system are subject to the same trading rules and requirements as orders which have been entered manually by a dealer or an investor.
Also, please note the existence of High Frequency Trading (HFT) [a subset of Algorithmic Trading]. HFT attempts to profit by exploiting market liquidity imbalances or short-term pricing inefficiencies. In as much, HFT is not a strategy onto itself rather a means of implementation and execution of a particular trading strategy on one (or several) electronic trading platforms and is characterized by higher trading volumes (hence smaller board lots), shorter holding periods, and smaller profits at the increment.
Algorithmic trading is available through many dealers and is used by institutional and even sophisticated retail investors. In an auction marketplace, the best-priced orders have priority whether such orders have been generated automatically by an algorithmic trading system or by manual entry.
While an algorithmic trading system can better a limit order entered by an individual at a speed which cannot usually be matched by an individual or a dealer, the "better price" is nonetheless available to a market order entered on the other side of the market. Investors receive the best available execution when the spread between the best bid price and the best ask price is at a minimum.
In addition, for your reference and review, I have included a link to a recently released study conducted by IIROC entitled, “The HOT Study: Phases I and II of IIROC’s Study of High Frequency Trading Activity on Canadian Equity Marketplaces”.
http://www.iiroc.ca/Documents/2012/2fb137e3-4371-43bd-b567-59b789a1e4d7_en.pdf
Lastly, changes to Market Regulation Policy follow only after careful study, consultation, and consideration supported by research and empirical evidence. More specifically, with respect to the TSX Venture Exchange, I have included a research piece entitled Price Movement and Short Sale Activity: The Case of the TSX Venture Exchange – which in part, was responsible for motivating market policy changes. This empirical study is a good read and has some interesting outcomes.
I trust you will find this information useful.
IIROC exists to develop, administer, surveil and enforce the trading rules known as the Universal Market Integrity Rules, in the Canadian securities market. You may find out more about UMIR by visiting our website at www.iiroc.ca. The link to UMIR is in the right navigation pane under “Rule Book”.
If you have any further concerns, please do not hesitate to contact us at any time.
Regards,
Harry Apostolatos
Sr. Complaints & Inquiries Specialist
Investment Industry Regulatory Organization of Canada
121 King St. W., Ste. 2000, Toronto, Ontario M5H 3T9
Phone: 416-646-7299 | Toll-free: 1-877-442-4322 – Option “2” | Fax: 416-364-6849
inquiries@iiroc.ca
IIROC: Protecting Investors and Fostering Fair and Efficient Capital Markets across Canada.
