Use of Market-On-Close Facilities

1. Background

MOC facilities offered by Canadian marketplaces are used to establish the closing price for eligible securities on that marketplace. They allow for the entry of both market MOC orders (orders with less price sensitivity that trade at the calculated closing price) and limit MOC (LOC) orders (orders that also trade at the closing price but to which a limit price can be applied). Typically, as the end of the trading day approaches, some orders entered into MOC facilities are restricted in terms of the ability to be changed or cancelled and are “locked-in” for trading at the close.

2. General prohibition on wash trades

Rule 2.2(1) of UMIR prohibits any manipulative or deceptive method, act or practice in connection with any order or trade on a marketplace. A Participant or Access Person is prohibited from entering an order on a marketplace if the Participant or Access Person knows or ought reasonably to know that any resulting trade will be either fictitious or involve no change in beneficial or economic ownership (a wash trade).

Similarly, a Participant or Access Person may have contravened Rule 2.2(2) if the Participant or Access Person knows or ought reasonably to know that the entry of the order or the execution of the trade will create or could reasonably be expected to create:

• a false or misleading appearance of trading activity in or interest in the purchase or sale of the security; or
• an artificial ask price, bid price or sale price for the security or related security.

Wash trading is a type of manipulative or deceptive activity. A Participant or an Access Person may be considered to have engaged in wash trading if the Participant or Access Person knows or ought reasonably to know that:

• orders for the purchase and for the sale of the same security are being entered on a marketplace;
• the orders are for the benefit of an account or accounts which have the same economic or beneficial owner and
• the orders have the potential of trading with each other.

3. Wash trades in a MOC Facility

The prohibition on manipulative and deceptive activity applies to the entry of orders or the execution of trades in a MOC facility. For example, the entry of an LOC order to off-set a market MOC order entered by the same Participant or Access Person constitutes a wash trade. Wash trading in a MOC facility is prohibited directly or indirectly, even in circumstances where a Participant or Access Person is trying to “correct” an erroneous market MOC order that may not otherwise be cancellable.

A Participant or Access Person should ensure the accuracy of orders entered into a MOC facility. If a Participant or Access Person becomes aware at any time that an order entered in a MOC facility is erroneous, the Participant or Access Person should immediately cancel the order if permitted. If the cancellation of an erroneous order entered into a MOC facility is no longer permitted due to the functionality of a MOC facility, the Participant or Access person should immediately contact CIRO’s Market Surveillance1 for guidance.

If it is determined to be in the interest of a fair and orderly market, Market Surveillance may specifically authorize the entry of an order in a MOC facility to offset another MOC order previously entered for the account of the same person. Where applicable, Market Surveillance may also issue a notice to the effect that a closing imbalance previously disclosed by a marketplace should be adjusted.

In determining whether to permit the entry of an off-setting order in a MOC facility, Market Surveillance will consider:

• the possible impact of the erroneous MOC Order on the closing price;
• the extent to which trading activity may have already occurred in the affected security based on a MOC imbalance report; and
• where applicable, whether there is sufficient time to issue a notice to the market of an adjustment to an imbalance report.

4. Exceptions from the general prohibition

CIRO recognizes that a particular trader can be trading multiple strategies at the same time. For example, the trader may have orders that are benchmarked to the closing price while also trading for a principal account. In these circumstances, the trader could enter a market MOC order and subsequently enter LOC orders in reaction to the broadcast of a large imbalance. However, the entry of the LOC order may prompt Market Surveillance to contact the trader who would have to demonstrate that the LOC order was not entered simply to “off-set” a market MOC order but in furtherance of a valid trading strategy.

5. Applicable Rules

UMIR Rules this Guidance Note relates to:

• UMIR 2.2

6. Previous Guidance Note(s)

This Guidance Note combines and replaces:

• Market Integrity Notice 2004-021 – Entry of Off-Setting Market-on-Close Orders (August 26, 2004)
• Market Integrity Notice 2006-008 – Use of the Market-on-Close Facility (March 10, 2006)

• 1Market surveillance contact information is available at: Surveillance Contacts