The Destruction of the Canadian Investor The Equedia Letter Ivan Lo May 26, 2013
The TMX October 4, 2012 Notice On October 4, 2012, the TMX Group sent notice to confirm "trading enhancements," set to begin on October 15, 2012.
The enhancements in the notice reflected recent regulatory amendments respecting short sale regulation, the introduction of a short marking exempt designation, amendments respecting dark liquidity on Canadian equity marketplaces, and functionality introduced as a result of client demand and market quality initiatives.
When you try to fight one problem with another problem, the result is never positive. I will explain what's happened in a bit. But first, take a look at the one year chart for the TSX Venture Composite since the rules were announced:
It doesn't take a rocket scientist to breakdown this chart.
Since the notice of the "Trading Enhancements Update" by the TMX, the TSX Venture has dropped like a rock. Why?
The Death Spiral When regulators forced the TMX Group to allow trading through alternative trading systems operated by third parties, it caused real time transparency issues.
When you combine the lack of transparency in parallel trading platforms with the use of High Frequency Trading (discussed last week), regulators had no choice but to eliminate the tick test rule, or uptick rule, for short selling. Let me explain.
Discontinuing Price Restrictions of Short Sell Orders (Tick Test) Historically, you could only sell a stock short if the price is higher than the last different price; simply put, you can only short a stock as it was moving up.
However, this rule only works when there is a strict sequence of orders in the order execution book; when bid/ask orders are placed in line on a first-come first-serve basis. But with parallel trading systems, a definitive sequence of different prices can't be established at any exact given point in time because one order book might show a down-tick, while the other an uptick. As a result, it would be extremely difficult to enforce the uptick rule
By allowing competing trading platforms and to encourage HFT (which was believed to create more liquidity), regulators had no choice but to remove the tick test rule.
In the October 4th announcement, the rule was eliminated: "TSX, TSX Venture Exchange (TSXV) and TMX Select will no longer constrain short sell orders to the last sale price. Short sell orders entered will be permitted to trade down to their limit price establishing a last sale price on a down tick. Short Crosses will no longer be constrained by the last sale price."
That means we can now short a stock anytime we want. That's great news for shorters, but for companies trying to raise money at higher prices to hire more staff or move their projects forward, that rule can cripple them - especially under the liquidity constraints of the Canadian market.
It doesn't take a lot of money to control a stock via short selling ---------. Ivan Lo The Equedia Letter