Market chatter rises, complaints decline: IIROC

It’s been a busy year for market regulators, despite a decline in the volume of complaints. Never mind enforcement action, the bigger job now is simply monitoring the vast quantity of market chatter, according to the annual report from the Investment Industry Regulatory Organization (IIROC).

There were huge increases in the number of orders to actual trades, which rose to a ratio of 52:1, compared to just 20:1 four years ago. Order volume reached 13.5 billion, while only 262.4 million trades were actually executed.

Daily “message traffic” averaged 100 million, a tenfold increase from four years ago. Message traffic consists of quotes, orders, and cancellations. Message traffic set a single-day record of over 330 million in the spring of 2010, thanks to the flash crash.

To deal with the noise generated by three exchanges and six alternative platforms, IIROC implemented its new Surveillance Technology Enhancement Platform, which blends live feeds from all nine platforms to create a virtual single marketplace. This makes monitoring somewhat easier.

Meanwhile, on the enforcement side of the operation, activity declined in 2009-2010, which may come as little surprise. The previous year saw an increase in client complaints, as their account statements revealed the ravages of the 2008 market declines.

Last year, IIROC received 429 complaints against dealer firms, which marked a decline of 8.1% from the previous year. Clients filed 1,482 complaints directly with their firm, which were forwarded to IIROC, a decline of 36.3%.

Out of all those complaints, IIROC completed 45 disciplinary hearings against eight firms and 37 individuals.

The SRO assessed $35.2 million in fines, suspended two firms and 12 individuals, with another 13 people being permanently banned. IIROC collected 96.9% of the fines it levied against firms, but only 17.5% of individual fines.

The SRO has little leverage to force a banned individual to pay their fine, but IIROC successfully defended its jurisdiction over former registrants in three legal challenges.

Among individuals, the most common violations in the enforcement actions were inappropriate personal financial dealings (15), followed by account handling and gatekeeper issues (13, each). There were 12 cases of theft, fraud or misrepresentation.

Among firms, the most common violations involved supervision (4) and inadequate books and records (3).

IIROC finished the year with $3.78 million in excess revenue over expenses in its unrestricted fund. The SRO took in $38.8 million in membership fees, the single largest item on the revenue side. On the expenditures side, IIROC spent $48.6 million on dealer regulation operating costs and $24.2 million on market regulation.

(09/13/10)