A Bay Street sign, a symbol of Canada's economic markets and where main financial institutions are located, is seen in Toronto in this file photo.Mark Blinc
The watchdog tasked with overseeing the surveillance of Canada's stock and debt markets has a new weapon to crack down on trading violations.
The Investment Industry Organization of Canada (IIROC) will announce Thursday it is upgrading the technology it uses to monitor trading and detect potentially abusive or manipulative activity. By switching to a newer version of Nasdaq Inc.'s popular SMARTS system, IIROC will gain greater visibility into what is taking place across sectors, asset classes and investment dealers. Securities commissions, in turn, will benefit as they rely on IIROC to feed them tips about potential violations such as insider trading.
How securities are traded is constantly evolving, becoming much faster and more automated, complex and global in nature. Regulators, meanwhile, are facing increasing pressure to catch and punish abusers even as they rely on outdated surveillance systems that still require them to sift through reams of data by hand.
"It probably has become easier, given the barrage of data and information that market surveillance organizations like ourselves have to look for, for anomalous behaviour to happen under the radar," Andrew Kriegler, IIROC chief executive officer, said this week during an interview. "We are catching up. We are making sure that we have the ability to look more effectively at what's going on."
The older version of SMARTS currently used by IIROC looks for irregular activity in single securities, generating real-time alerts when anomalies are detected to the 24 people who work on IIROC's surveillance team in Toronto and Vancouver. But then, the process of trying to determine possible reasons behind these movements largely becomes a manual and time-consuming one.
Slated to be fully installed by the summer of 2018, the new system promises to automate many of those tasks, affording IIROC's surveillance team the ability to quickly see any patterns across both equity and debt markets, investment dealers, specific industries and other correlated securities. It will also distill millions of pieces of data into visuals and become better at identifying suspicious activity over time through artificial intelligence.
"My team spends a lot of time digging through large volumes of data," said Victoria Pinnington, IIROC's senior vice-president of market regulation. "The system will allow us to automate a lot of that, so the team can really focus on the right priorities."
Everyday in real time, the new system is capable of monitoring up to one billion transactions, including trades, quotes and orders. Today, IIROC processes an average of 254 million transactions per day, once reaching a peak of 482 million transactions.
Potential trading abuses can then be referred to IIROC's enforcement division or, if the matter falls outside IIROC's jurisdiction, to the appropriate provincial securities commission for further investigation. In 2016, Ms. Pinnington said IIROC made 60 referrals to the securities commissions, half of which were for market manipulation.
In its latest fiscal year ended March 31, IIROC says it monitored more than 446 million trades executed on Canada's five stock exchanges and its eight alternative-trading systems, co-ordinated 1,470 trading halts and 83 cease-trade orders, and triggered 53 single-stock circuit breakers.
"We've always looked for anomalous behaviour, but I think this will give us a huge step up in our ability to find it," Mr. Kriegler said. "And when we find it, we're going to do something about it."
But the new technology alone is no guarantee that regulators will score more prosecutions or bigger fines.
"The larger the size of the pile of hay that you are hiding in, the easier it is to hide a needle," added Mr. Kriegler. "The pile is getting bigger and you want get your needle-finder to be as effective as you possibly can and I think we've taken a big step with that."