Broker Dealers to Comply with Canada's Regs on Automated Trading Risk Controls

Newedge has deployed Succession Systems’ TripleCheck Market Access Risk Solution for operation in Canada and the United States to meet the compliance requirements for automated trading risk controls, according to the software provider.

The deployment by Newedge reflects the global trend toward automated trading rules that are rolling out across the world since the U.S. authorized15c35 in July 2011, known as the Market Access Rule.

Brokers operating in Canada were given until today, May 31st, to implement automated pre-trade risk checks on orders. “There’s a requirement in Canada that every order that goes to an exchange in Canada needs to be reviewed or validated on a pre-trade basis,” said Anthony Masso, CEO of Succession Systems in an interview with Advanced Trading on Thursday.

The guidelines from the Investment Industry Regulatory Organization of Canada (IIROC) were published in December 2012 in an amendment, which mandates that brokers install pre-order entry filters for all trades before they hit an exchange. The rule took effect in March 2013 but brokers were given until May 31 to complete testing and implement automated risk controls.

Brokers must ensure that orders are compliant with position and credit checks in real-time before they are submitted to the market. And orders need to be aggregated across accounts before they enter the market.

According to Masso, the rule is setup very similarly to the U.S. “It requires broker dealers that have access to the market to put together a document that outlines policies and procedures how they are going to validate pre-trade every order that goes to the market, how they are going to monitor intraday and what they’re doing on a post-trade basis. Brokers need to make sure they are reviewing the orders, and that limits are set properly. There’s both a pre-trade monitoring and post-trade requirement and brokers have to certify that all this is being done by the end of the year, said Masso.

Masso, who founded the company three years ago, has been building out the risk systems and controls. “It’s not just the capabilities but the platform itself so it is scalable and can be deployed in multiple locations, across geographies and to large broker-dealers.

In the case of larger brokerage and clearing firms such as Newedge, TripleCheck is able to tie in third-party vendors that are used within Newedge, tie in proprietary trading firms that are trading under Newedge’s umbrella, as well as sell-side firms.

While broker dealers “are looking for black and white rules,” according to Masso, that’s now how the rule sets up, he adds. “By no means is it a check list. It’s all about knowing the client, knowing how they trade and forming policies and procedures to react to what could go wrong,” said Masso, adding that it won’t be cookie cutter for each broker-dealer.

One of the problems is that bigger broker dealers receive orders through multiple systems, both third party and proprietary systems and how that all is tied together, said Masso. "They also have an obligation to set risk profiles for clients and monitor that throughout the day,” he said.

Succession’s system can set capital checks, order checks symbol checks, and reject orders if they hit a limit, such as if someone has exceeded their buying power. “Logs are created, emails are sent pop-ups are generated for any risk manager that is watching the system,” said Masso.

The software was specifically built to address risk challenges that compliance officers face, he said.

Besides the compliance issue, there’s the also performance issue since the pre-order risk checking can add latency which can impacts trading. “All of our scans are done in nanoseconds,” said Masso. “Latency is important even if you are not a high –frequency trading firm,” said Masso. The client would connect to Succession Systems, which would in turn connect to the various venues such as Nasdaq, BATS, and Newedge.

“All orders are routed through Successions’ system which can be colocated in a data center near the equity exchanges’ matching engines. “We connect wherever the client maintains connections. It could be within Nasdaq ‘s data center in Cartaret and BATS at Savvis in Weehawken and others.

Right now, TripleCheck is focused on requites but it’s going to have risk controls for futures soon. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio