IIROC ‘Tips for Traders’ CSTA Whistler Friday, August 19 2016

Senior Vice-President, Market Regulation Opening Remarks Victoria Pinnington Senior Vice-President, Market Regulation

Vice-President, Surveillance Vice-President, Market Regulation Policy IIROC Presenters Mike Prior Vice-President, Surveillance Kevin McCoy Vice-President, Market Regulation Policy

Topics Market Structure Issues Affecting Small-Cap Issuers Roundtable Recap Trader IQ – test your knowledge

Market Structure – Small-Cap Securities Differentiation between Large and Small Cap Securities Reduced liquidity Capital Formation Challenges Short Selling – Tick Rules HFT and Volatility Education

TRADER IQ – Test your Knowledge

Question 1 At 10:00 am, a client requests a liability bid for a block of illiquid ETFs. After checking the depth of both the ETF and cash markets, a sell side trader offers the client a complete fill at a discount of 50 basis points to fair value, and the client accepts. The trade can execute the cross at the agreed upon price as a Basis Order, without needing to displace interfering bids.

Order received at 10:00. May print as a Basis Order without displacement obligation. True False

Question 2 The NBBO is 15.50 – 15.60. A dealer receives an order to sell a block of stock at $ $14.50 or better. There are only a few small bids down to that price. The dealer offers the client a complete fill on his block at $14.50 and the client accepts. The trader can use an inventory bypass DAO sell order to sweep all visible bids down to that price and immediately execute a bypass cross at $14.50.

NBBO 15.50 – 15.60. Order to sell at 14.50. DAO to sweep and immediately execute by-pass cross at 14.50 True False

Question 3 A dealer is part of a syndicate distributing a new issue at a price of $10.00 per share, and the market is currently $10.00 bid, offered at $10.05. Market stabilization rules are in effect. The dealer receives an unsolicited, institutional client order to sell a block of free trading shares at $10. Rather than hit the bid, the trader can contact a client that he thinks may be interested, with the goal of arranging a client/client cross at a price that is no higher than $10 and does not create an uptick.

NBBO 10.00 – 10.05. Order to sell at 10.00. Stabilization bids entered at 10.00 True False

Question 4 It is after 4:00, and the closing price on the TSX is $12.75 and the closing bid is $12.80. (The trade occurred at 3:57 p.m., after which a bid of $12.80 was entered). A trader has a closing price order from a client and wishes to execute a cross at the TSX closing price of 12.75.

TSX Close - $12.80 - $12.85 Last $12.75 Order to trade at closing price. Under OPR the trader: Must first displace the $12.80 bid Can displace the $12.80, but is not required to Is unable to displace the $12.80 bid and can only cross at $12.75 Must displace any protected better priced order prior to executing the cross at $12.75

Currently, the Corporate Debt Information Processor (IIROC) is publishing details about the following corporate debt trades: All trades by Government Securities Distributers (GSD) All institutional trades by GSDs All institutional trades and some retail trades by GSDs Some institutional trades and all retail trades by GSDs

Question 6 The NBBO for a stock is $0.85 - $0.90 and the stock’s previous close price was $0.90. A trader with a client order to buy 20,000 shares at market has decided to fill the client out of inventory. Due to the large size of the order, the trader is permitted to execute a principal-client cross at $0.90.

NBBO. 85 -. 90. Previous close. 90 Client-Principal cross at NBBO .85 - .90. Previous close .90 Client-Principal cross at .90 is permitted. True False

Question 7 The NBBO for a stock is $0.85 to $0.90. An order to sell 400 shares is sent to a dark market. That market can execute the trade at $0.85, without price improvement.

NBBO. 85 -. 90. Active order to sell 400 shares executable at NBBO .85 - .90. Active order to sell 400 shares executable at .85 on a Dark Market True False

Intentional (upstairs) crosses that are printed on a marketplace do not have to be disclosed as such on the public tape. True False

Question 9 A trader accepts a guaranteed VWAP order from a client at 9:00 a.m. The VWAP will be determined between 9:30 and 4:00. In accordance with IIROC guidance, the trader is required to notify IIROC prior to the start of the calculation period, but fails to follow the guidance. The trader is still permitted to execute a VWAP trade after 4:00 p.m.

VWAP order received at 9:00 and IIROC not notified VWAP order received at 9:00 and IIROC not notified. The trader is still permitted to execute a VWAP trade after 4:00 p.m. True False

Question 10 A client that has previously executed a short sale without being able to borrow shares, where the trade remained unsettled for 10 days following the original settlement date (T+13) cannot make any further short sales in any listed security without first arranging a pre-borrow.

Client who fails settlement on T+13 must pre-borrow prior to any subsequent short sales. True False

Question 11 A portfolio manager is responsible for a number of investment funds that in aggregate own 12% of the voting shares of a listed company. Any orders for that listed company on behalf of that money manager must be marked as insider by the dealer upon entry.

Portfolio manager – aggregate holdings of 12% of a listed issuer Portfolio manager – aggregate holdings of 12% of a listed issuer. Trades must be marked as insider True False

A dealer has a client who wishes to sell securities that are subject to a statutory re-sale restriction. The dealer can: Sell the securities on a marketplace as the securities are considered listed securities Sell the securities on a marketplace provided the buyer is an accredited investor Sell the securities off-exchange Sell the securities off-exchange after receiving approval from IIROC

A client holds shares that are subject to a statutory hold period expiring in 3 months. The client may sell the freely trading shares and carry the long/short position until the hold period expires. True False

When making decisions on where to route orders, a dealer is only required to consider those marketplaces that are “protected”. True False

Questions?