IIROC Backgrounder: Surveillance Technology Enhancement Platform (STEP)

What is STEP?

STEP -- the Surveillance Technology Enhancement Platform – is IIROC’s new advanced system for monitoring trading activity on Canadian equity markets. STEP ensures that IIROC will continue to keep pace with the dramatic increase in the speed and volume of trading activity in the Canadian equity markets. The STEP platform is directly managed and maintained by IIROC, giving IIROC more flexibility to respond more quickly to changing market conditions and structure. Its cost-effective, scalable technology gives IIROC enhanced cross-market monitoring and analytical capability, and facilitates the development of more effective surveillance alerts. The STEP platform is in place now with initial cross-market monitoring capabilities and a full suite of alerts will be in place by the end of calendar 2010.

IIROC’s Surveillance Role

Under Recognition Orders issued by the Canadian Securities Administrators (CSA) and by agreement with the marketplaces, IIROC monitors all market activity to ensure trading is carried out in accordance with Canada’s Universal Market Integrity Rules (UMIR).  While equity trading is fragmented across multiple trading venues in Canada, regulatory oversight is centralized in IIROC. IIROC monitors all trading activity at Canada’s three stock exchanges and six Alternative Trading Systems (ATSs) under a single set of rules.

Explosive growth in volumes – trades and ‘messages’

The Canadian marketplace has seen a dramatic growth in speed and volume of trading, spurred in large part by the advent of automated or algorithmic trading and High Frequency Trading (HFT) strategies. For example, IIROC monitored over 262 million trades last year, nearly double the number seen just two years earlier. Even more explosive is the growth in “messages”, which include quotes, orders and cancellations in addition to trades themselves. Four years ago, Canadian equity markets handled an average of 10 million messages per day. Today they regularly handle more than 180 million messages each day and traffic hit a one-day record of more than 330 million in May of this year. Based on forecasts provided by marketplace participants the Canadian marketplace may see message volumes escalate as high as 725 million per day by mid 2011. IIROC is planning to shortly implement upgrades to STEP, building capacity to handle up to 1 billion messages per day.

The role of alerts in surveillance

IIROC surveillance analysts design alerts that are integrated into the STEP platform to monitor trading for unusual activity. When triggered, the alerts point to trading patterns that staff can initially analyze and further investigate, if necessary. Alerts can be set using algorithms to identify unusual patterns in prices or volumes, as well as to flag indications of possible rule infractions.

The STEP system was designed to improve former surveillance alerts and allows IIROC analysts to design new kinds of alerts, including those with the ability to track trading activity across multiple marketplaces in a single window.

STEP features enhance IIROC surveillance

STEP:

• allows IIROC to simultaneously monitor multiple markets (currently there are nine marketplaces) by consolidating different market regulatory data feeds, giving IIROC a single window on all trading activity. Previously, IIROC monitored activity on each market individually.
• avoids the need for costly and time-intensive upgrades to the previous system in order to keep up with market developments and trading volumes. Regulators need to be able to rely on a surveillance technology that is scalable and adaptable in a cost-effective manner.
• adds more monitoring capacity. STEP will process 400 million messages per day at peak traffic of 35,000 messages a second, and up to 2 million trades a day. It is easily scalable to meet the anticipated growth in the volume of messages and trades.
• gives IIROC the ability to institute cross-market alerts to more easily monitor trading activity on all marketplaces in a particular security or by an individual market participant.
• enables IIROC to more easily identify potential violations such as “trade- throughs” or “best execution.”
• provides the potential for cross-product monitoring of other securities related to particular stocks. This allows IIROC to more effectively monitor trading in a single window of related securities, such as a company’s stock, its corporate bonds and its equity options.
• accepts feeds in standardized formats, providing consistency and making compliance easier and more cost-effective for the exchanges and ATSs.
• delivers more storage of trading data in a cost-effective manner, allowing analysts to better understand and study market activity, and conduct post- trade reviews and investigations.
• generates more customized reports to IIROC analysts on market activity than previously available to IIROC, thus assisting in IIROC analysis and investigations.
• makes enhancements easier to implement, allowing IIROC to quickly adapt to changing market structure and conditions.

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For more information contact:

Connie Craddock
Vice President, Public Affairs
416.943.5870 or ccraddock@iiroc.ca
September 29, 2010