Podcast
Questions and Answers
What is the purpose of the Order Protection Rule (OPR)?
What is the purpose of the Order Protection Rule (OPR)?
- To promote fairness in the market and maintain investor confidence. (correct)
- To eliminate the need for market participants to have policies.
- To ensure transparency in trade executions.
- To allow inferior-priced limit orders to be executed first.
What responsibility do marketplace participants have regarding directed-action orders (DAOs)?
What responsibility do marketplace participants have regarding directed-action orders (DAOs)?
- They are exempt from trade-through obligations altogether.
- They must ensure all orders are executed at any available price.
- They need to implement policies to prevent trade-throughs. (correct)
- They should not enter DAOs that limit market access.
What do Smart Order Routers (SORs) do?
What do Smart Order Routers (SORs) do?
- They automatically analyze and distribute orders for the best execution. (correct)
- They restrict order execution to one specific marketplace.
- They prioritize the execution of inferior-priced orders.
- They are designed to reduce execution costs for the participant.
Under best execution requirements, what must participants strive for?
Under best execution requirements, what must participants strive for?
What does UMIR Rule 2.1 state about market participants' conduct?
What does UMIR Rule 2.1 state about market participants' conduct?
What scenario would be considered contrary to just and equitable principles of trade?
What scenario would be considered contrary to just and equitable principles of trade?
What could be a reason for engaging in manipulative or deceptive trading practices?
What could be a reason for engaging in manipulative or deceptive trading practices?
Who bears the burden of establishing policies to prevent trade-throughs under OPR?
Who bears the burden of establishing policies to prevent trade-throughs under OPR?
What does the term 'best execution' imply for a participant?
What does the term 'best execution' imply for a participant?
What constitutes a fictitious trade?
What constitutes a fictitious trade?
Which of the following best describes wash trading?
Which of the following best describes wash trading?
What is a primary goal of implementing the OPR?
What is a primary goal of implementing the OPR?
Which activity could complicate the detection of manipulative trading practices?
Which activity could complicate the detection of manipulative trading practices?
What is matched trading characterized by?
What is matched trading characterized by?
What should compliance officers focus on when evaluating potential manipulative trading?
What should compliance officers focus on when evaluating potential manipulative trading?
What might result from deceptive trading practices in the stock market?
What might result from deceptive trading practices in the stock market?
How do regulators typically respond to unintentional wash trading?
How do regulators typically respond to unintentional wash trading?
Under UMIR Rule 2.2, what implies manipulative or deceptive market activity?
Under UMIR Rule 2.2, what implies manipulative or deceptive market activity?
Which of the following practices is least likely to be considered manipulative or deceptive trading?
Which of the following practices is least likely to be considered manipulative or deceptive trading?
What action must a broker-dealer take after failing for 13 consecutive settlement days in a threshold security close-out?
What action must a broker-dealer take after failing for 13 consecutive settlement days in a threshold security close-out?
What is the consequence for a broker-dealer who fails to buy in the required securities?
What is the consequence for a broker-dealer who fails to buy in the required securities?
Which of the following is considered front-running?
Which of the following is considered front-running?
For front-running to occur, what must a participant possess?
For front-running to occur, what must a participant possess?
What is a requirement for a dealer member acting as principal in a client trade involving standard trading units?
What is a requirement for a dealer member acting as principal in a client trade involving standard trading units?
Which of the following actions is prohibited during front-running situations?
Which of the following actions is prohibited during front-running situations?
How do front-running rules extend beyond direct trading?
How do front-running rules extend beyond direct trading?
What condition must be fulfilled before a firm can act as principal on a listed equity?
What condition must be fulfilled before a firm can act as principal on a listed equity?
What must chief compliance officers be aware of regarding principal trades?
What must chief compliance officers be aware of regarding principal trades?
Which scenario would not be classified as front-running?
Which scenario would not be classified as front-running?
How should clients be informed about the potential for principal transaction engagements?
How should clients be informed about the potential for principal transaction engagements?
What best describes the primary objective of rules against front-running?
What best describes the primary objective of rules against front-running?
What must a Participant do if trading intentionally crosses as principal?
What must a Participant do if trading intentionally crosses as principal?
What is required before a broker-dealer can accept additional short sale orders after a fail?
What is required before a broker-dealer can accept additional short sale orders after a fail?
What should the person accepting a trade order do if it is expected to result in a principal transaction?
What should the person accepting a trade order do if it is expected to result in a principal transaction?
What is the primary focus of the minimum trade desk compliance procedures under UMIR Rule 7.1?
What is the primary focus of the minimum trade desk compliance procedures under UMIR Rule 7.1?
Which of the following best defines 'best execution' as stated in the ATS Rules?
Which of the following best defines 'best execution' as stated in the ATS Rules?
What is a key factor that must be considered when assessing whether a trade could affect the market?
What is a key factor that must be considered when assessing whether a trade could affect the market?
What obligation do dealers and advisers have under the ATS Rules regarding best execution?
What obligation do dealers and advisers have under the ATS Rules regarding best execution?
What does the client priority rule address when considering PRO trades?
What does the client priority rule address when considering PRO trades?
Which aspect of trading does best execution NOT typically include?
Which aspect of trading does best execution NOT typically include?
What might warrant closer scrutiny of a PRO trader's actions regarding thinly traded securities?
What might warrant closer scrutiny of a PRO trader's actions regarding thinly traded securities?
What is a common misconception about best execution?
What is a common misconception about best execution?
Which of the following is NOT a factor in assessing best execution?
Which of the following is NOT a factor in assessing best execution?
What does front-running address in the context of trade review procedures?
What does front-running address in the context of trade review procedures?
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Study Notes
Order Protection Rule (OPR)
- The Order Protection Rule (OPR) was implemented in 2011 and mandates that all immediately accessible, visible, better-priced limit orders are executed before inferior-priced limit orders.
- This rule aims to maintain market fairness and investor confidence by rewarding investors who contribute to price discovery.
- Marketplaces are responsible for implementing policies and procedures to prevent trade-throughs.
- However, directed-action orders (DAOs) are exempt from these trade-through prevention obligations.
- Participants entering DAOs are responsible for implementing their own policies to prevent trade-throughs.
Best Execution
- The "best execution" principle requires participants to diligently seek the most advantageous execution terms for client orders, considering all relevant circumstances.
- Smart Order Routers (SORs) are now standard for dealers, automatically assessing multiple marketplaces (exchanges and ATSs) to find the best execution.
Just and Equitable Principles of Trade
- Business must be conducted openly, fairly, and according to just and equitable principles of trade.
- These principles act as a general anti-avoidance provision, preventing participants from intentionally circumventing rules through business arrangements.
- An example of violating these principles is avoiding order entry obligations by using another person to trade off-market without a valid exemption.
Manipulative and Deceptive Trading
- Manipulative or deceptive trading violates UMIR Rule 2.2 and CIRO rules.
- It involves activities that create an illusion of market activity, generate interest, or attract order flow.
- It also includes activities that manipulate prices for valuations or deceive other participants.
Examples of Manipulative and Deceptive Trading
- Fictitious trades involve excessive activity among a limited number of accounts, especially at a common price.
- Wash trading involves creating trades with no actual change in ownership, particularly between inventory accounts.
- Matched trading is a variation of wash trading where two individuals place offsetting orders with the same size, price, and time.
Front-Running
- Front-running is a prohibited activity where a participant uses knowledge of a client order that could affect the market price to benefit themselves or a third party before executing the client order.
- It involves trading ahead of a client or benefiting from confidential information about client orders.
Types of Activities Prohibited during Front-Running
- Entering principal or non-client orders for the security or related securities
- Soliciting trades in the security or related securities
- Informing others (except in the necessary course of business) about the client’s order.
Client Priority Rule
- The client priority rule addresses potential conflicts when a proprietary trader (PRO) enters an order around the same time as a client.
- The PRO must make appropriate trade declarations and ensure their order doesn't adversely impact the market, especially in thinly traded situations.
Principal Trading
- Dealer members can act as principal in order execution with specific conditions.
- Clients must be informed about the principal basis of the trade on the confirmation.
- The client must be provided with a price as good as, or better than, an agency trade for listed equities.
- UMIR Rule 8.1 governs client-principal trades on public equity marketplaces.
- For trades of 50 standard trading units or less, the participant must offer a better price than any Canadian marketplace for trades that are intentional crosses.
- Client consent is generally required for agent-to-principal trades.
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