Partially Repealed Guidance: See Market Integrity Notice 2007-015 – “Specific Questions Related to Trading on Multiple Marketplaces” (August 10, 2007). See also guidance for Rules 2.2, 5.1, and 7.1. Questions 5, 8, 9 and 12 in MIN 2007-015 were repealed and replaced effective May 16, 2008 by Market Integrity Notice 2008-010 – “Guidance – Complying with “Best Price” Obligations” (May 16, 2008). Questions 7, 8 and 10 of MIN 2007-015 were partially repealed effective January 2, 2018 by IIROC Notice 17-0138 – “Guidance on Best Execution” (July 6, 2017).
Regulatory History:
Effective August 27, 2004, the applicable securities commissions approved the amendment to permit a short sale of an Exchange-traded Fund on a downtick. See Market Integrity Notice 2004-023 – “Provisions Respecting Short Sales” (August 27, 2004).
Effective April 8, 2005, the applicable securities commissions approved an amendment to permit a short sale of a Basis Order on a downtick. See Market Integrity Notice 2005-010 – “Provisions Respecting a “Basis Order”” (April 8, 2005).
Effective March 9, 2007, the applicable securities commissions approved an amendment to permit a short sale of a Closing Price Order on a downtick. See Market Integrity Notice 2007-002 – “Provisions Respecting Competitive Marketplaces” (February 26, 2007).
Effective May 16, 2008, the applicable securities commissions approved an amendment to permit a short sale on a downtick if the order is made for purposes of complying with the Order Protection Rule. See Market Integrity Notice 2008-008 – “Provisions Respecting “Off-Marketplace” Trades” (May 16, 2008).
In connection with the recognition of IIROC and its adoption of UMIR, the applicable securities commissions approved an amendment to clause (h) at subsection (2) of Rule 3.1 that came into force on June 1, 2008 to replace the phrase “Rule or” with “provision of UMIR or a ”. See Footnote 1 in Status of Amendments.
Effective January 8, 2010, the applicable securities commissions approved amendments to replace the words “Exchange-traded Fund” with “Exempt Exchange-traded Fund”. See IIROC Notice 10-0006 – “Provisions Respecting Trading During Certain Securities Transactions” (January 8, 2010).
Effective August 26, 2011, the applicable securities commissions approved amendments to repeal a reference to “Market Maker Obligations” and replace it with a reference to “Marketplace Trading Obligations”. See IIROC Notice 11-0251 - “Provisions Respecting Market Maker, Odd-Lot and other Marketplace Trading Obligations” (August 26, 2011).
On March 2, 2012, the applicable securities commissions approved amendments to repeal Rule 3.1 and Policy 3.1 effective October 15, 2012. See IIROC Notice 12-0078 – “Provisions Respecting Regulation of Short Sales and Failed Trades” (March 2, 2012). Prior to that date, Rule and Policy 3.1 provided:
3.1 Restrictions on Short Selling
Prior to the opening of a marketplace on a trading day, a short sale may not be entered on that marketplace as a market order and must be entered as a limit order and have a limit price at or above the last sale price of that security as indicated in a consolidated market display (or at or above the previous day’s close reduced by the amount of a dividend or distribution if the security will commence ex-trading on the opening).
When reducing the price of a previous trade by the amount of a distribution, it is possible that the price of the security will be between the trading increments. (For example, a stock at $10 with a dividend of $0.125 would have an ex-dividend price of $9.875. A short sale order could only be entered at $9.87 or $9.88.) Where such a situation occurs, the price of the short sale order should be set no lower than the next highest price. (In the example, the minimum price for the short sale would be $9.88, being the next highest price at which an order may be entered to the ex-dividend price of $9.875).
In the case of a distribution of securities (other than a stock split) the value of the distribution is not determined until the security that is distributed has traded. (For example, if shareholders of ABC Co. receive shares of XYZ Co. in a distribution, an initial short sale of ABC on an ex-distribution basis may not be made at a price below the previous trade until XYZ Co. has traded and a value determined).
Once a security has traded on an ex-distribution basis, the regular short sale rule applies and the relevant price is the previous trade.
Disciplinary Proceedings: In the Matter of Salman Partners Inc. (“Salman”), Sameh Magid (“Magid”), William Burk (“Burk”) and Ian Todd (“Todd”) (February 18, 2005) SA 2005-001
Facts – Between April 1, 2002 and July 30, 2002, Salman engaged in a paired trading strategy with one of its institutional clients which it erroneously believed constituted arbitrage trading. The arrangement did not in fact constitute arbitrage trading for the purposes of UMIR, and as such, the trades entered as part of the strategy did not benefit from the various exemptions provided for under UMIR, and caused Salman to violate numerous UMIR provisions. In April 2002, Salman engaged in trading in a second issuer that resulted in certain transactions being recorded off-market when those transactions ought to have been posted on an exchange. Finally, in another trade, Salman failed to properly supervise a trader’s attempt to cover a short position in an issuer when a client submitted a buy order in the same security. Throughout these events, Salman failed to maintain a proper audit trail for their order flow.
Disposition – Salman failed to develop and implement appropriate policies and procedures to fulfill its compliance and supervisory obligations in relation to its trading on marketplaces regulated by RS, including failing to ensure that employees with supervisory responsibilities had clearly defined roles and responsibilities and that audit trail requirements were complied with. Several senior officers were found to have failed in their supervisory responsibilities as well.
Requirements Considered – Rules 3.1, 5.3(6), 6.2(1)(b)(viii) and (x), 6.4, 7.1 and 10.11(1) and Policy 7.1
Sanction –
Salman Partners Inc. – $600,000 fine and costs of $90,000
Sameh Magid – $80,000 fine and costs of $15,000; personal undertakings
William Burk – $30,000 fine
Ian Todd – $30,000 fine
Disciplinary Proceedings: Rule 3.1 was considered In the Matter of Vinh-Phat Nguyen-Qui (“Nguyen-Qui”) (October 11, 2012) DN 12-0298. See Disciplinary Proceedings under Rule 2.2.