Combating HFT's and Market Manipulation
Combating HFT's and Market Manipulation
Canadian retail investors are being defrauded. It is time the Investment Industry Regulatory Organization of Canada (IIROC) listened to us, and started protecting investors from illegal practices. As a large group of retail investors, we urgently call on the government to implement and to enforce the rules and regulations that will ensure fair trading practices on Canadian exchanges.
The first area that should be addressed is High Frequency Trading. HFT algorithms are at a distinct advantage and any rules under which they operate need to be scrutinized and addressed. If no rules exist, it’s time to acknowledge the present issues and implement new standards under which Canadian exchanges operate. The harm they are inflicting on both individuals and companies who rely on investment capital to sustain their businesses has hit a tipping point. Here are a few examples of the advantages they have over retail investors…
-Spoofing- By being able to put up fake bids and asks very quickly they can influence retail investors to buy or sell accordingly. A simple solution is to increase fees for HFT trading (applied to each order whether processed or not) which would make spoofing a less attractive form of manipulation.
-Lot Size- Lot size is not regulated for HFT’s, thus allowing them to do many small trades that can be listed as anonymous. By increasing the lot size for HFT’s, retail could acknowledge who is doing the trading and by assigning tracking numbers to trades we could take one step closer to a more transparent market.
-Speed- HFT’s operate at a very high speed (milliseconds or less). This places retail investors at a distinct disadvantage, "front running” buying and selling allows HFTs to get their orders filled before retail has a chance. By limiting the speed at which they operate we can limit the effect they have on many fronts and create a more equal playing field.
Finally, given that HFTs operate with large amounts of money, they can trigger stop losses at will and drop into the bid. Most retail investors do not have this ability, creating an unfair advantage as they will do this throughout the trading day pushing the price up and down to their benefit. It has become a computer driven marketplace and effectively removing the human element to trading. With advancement in AI technology the problems will only get worse if these issues are not addressed
The next area that needs to be addressed is the use of Shorting. While most will agree, shorting has its place. The way in which it is being executed is outright criminal. As the world becomes more connected through the internet and social media, the rules around the practice need to be adapted. These practices often have dire effects on the companies as much as it does on investors alike. Here are some examples of some of the questionable techniques utilized to short a stock…
-Naked shorting- Naked short selling is short selling without first borrowing the security or ensuring the stock can be borrowed. Brokers writing naked short positions should have liability attached and should be required to authenticate share certificates if the validity of those shares should come into question. Also, retail investors should be informed when their shares are being used to short by their brokerage.
-Social Media- Has become a platform for short attacks. Distorting facts, slandering a company and its management, or just subtle bearish comments on social media have become the norm. Companies are paying people to create disturbances in the market for the sole purpose of shorting. Not only do we see this in social media but some companies use television interviews, which have a much larger platform to project their agenda onto retail investors. This approach should be banned all together as it directly affects a company’s ability to gain investor confidence and to raise capital.
- Stop loss-These positions are easily identifiable, which allows for those who are shorting to know how far they can suppress the share price. Again, offering institutional banks, HFT’s and Shorting companies the advantage.
One of the core values of the IIROC is to “conduct ourselves in an ethical manner in accordance with the highest degree of fairness and professionalism”. Their mandate is to protect investors and strengthen market integrity. As retail investors, we are being manipulated and defrauded through an unfair system, and it’s time the IIROC and Canadian government step up and repair this system.