Introduction

On May 5, 2014, IIROC hosted a Venture Market Roundtable in Vancouver concerning some of the issues facing junior markets for the past several years, with particular focus on trading and financing activity. To help facilitate discussion, IIROC prepared summary background papers on the trading matters dealing with:

• general market trading activity;
• downtick shorting;
• tick size; and
• electronic trading.

This notice sets out a selection of the background information and statistics provided by IIROC to participants at the Venture Market Roundtable, based principally on trading data of securities listed on TSX Venture Exchange (“TSXV”) during the period January 1, 2012 to March 31, 2014, and includes information from all Canadian marketplaces trading those securities.

Background Information and Statistics

General Trading Activity

Generally speaking, trade volumes of TSXV-listed securities declined throughout much of the period, reaching a low in the summer of 2013. More recently, trading volumes have recovered almost to the levels of early 2012.

Of the 2,168 issuers listed on the TSXV as at September 30, 2013:

• on any given trading day in the month of September, an average of only 1,125 (or 51.89%) of the 2,168 listed issues traded;
• 135 (or 6.23%) of the issues eligible for trading on the TSXV during the month did not trade on any trading day during the month;
• an additional 77 (or 3.55%) of the issues were “halted” throughout the month and did not trade;
• an additional 54 (or 2.49%) of the issuers had their listing “suspended” and did not trade at any time during the month;
• of the 1,902 issues that traded during September, 1,158 (or 60.88%) of these issues closed trading at a price of $0.10 or less;
• of the 744 issues that traded during September and closed trading at a price of more than $0.10, 65 (or 8.74%) of these issues traded at a price of less than $0.10 at some point during the month; and

• the average volume of a trade was 6,471 shares with trade value of $2,588 resulting in an average price per security traded of $0.40.

Downtick Shorting

Effective October 15, 2012, the Universal Market Integrity Rules (“UMIR”) were amended to remove restrictions on the price at which a short sale could be executed (“tick test”). Prior to October 15, 2012, a short sale could not be executed at a price which was less than the “last sale” price of the security unless the short sale was exempted from the price restrictions (as in the case of arbitrage accounts and persons with market maker obligations). The amendments to UMIR provided that these accounts would not need to mark short sale orders but would instead mark the orders as “short-marking exempt” (“SME”). The types of accounts which were to mark orders as “short-marking exempt” were extended to encompass accounts that, in the ordinary course of trading activity, were “directionally neutral” in that the account generally at the end of each trading day did not hold either or a short or a long position in securities. (For these accounts, all sell orders would be identified as “short-marking exempt” whether or not the specific sale was being made from a long or short position.)

The following chart indicates the percentage of sale volume in TSXV-listed securities identified as “short sales” during the period January 1, 2012 to March 31, 2014 and the percentage of sale volume identified as “SME” since October 15, 2012. Overall, short sales accounted for 8.21% of volume prior to the amendments. Following the amendments short sales accounted for 5.54% of volume with an additional 2.73% accounted for by sales marked as “SME” (for a combined total of short/SME of 8.27%).

The following chart indicates the percentage of short sales that were executed on an “uptick” (a price higher than the last sale price), a “zero tick” (the same price as the last sale) or a “downtick” (a price lower than the last sale price). Prior to the repeal of the tick test for short sales on October 15, 2012, an average of 2.47% of short sales were executed on a downtick (as certain types of accounts were exempted from the price restriction). As anticipated, in the period since the repeal, the proportion of short sales executed on a downtick increased to 6.58%; however the vast majority of short sales are still executed on an uptick or zero tick.

The following table summarizes the proportion of short sale volume in the periods before and after the repeal of the tick test that was executed on an uptick, zero tick and downtick. It also sets out the comparable data for trades other than short sales.

Of particular note is the fact that notwithstanding the repeal of the tick test, a short sale is approximately half as likely to execute on a downtick as other sales. Equally interesting is the fact that a short sale is more likely to execute on an uptick than other sales.

IIROC also presented data on short selling activity based on the liquidity category of the issuer on a particular trading day. Issuers were divided into three liquidity categories: high, medium and low. As expected, the higher the level of liquidity for a security, the higher the proportion of volume traded that is accounted for by short sales.

The following graph depicts this relationship for each trading day during the period.

Tick Size

Since at least 1974, securities trading at less than $0.50 have traded with half-cent ($0.005) increments and securities trading at less than $3.00 have traded with one-cent ($0.01) increments. Since 2000, all securities trading at $3.00 and above have traded with one-cent ($0.01) increments.

Based on trading data for TSXV-listed securities for the period October 28, 2013 to November 21, 2013, IIROC undertook an analysis of the impact of tick size on TSXV-listed securities. A security was considered to be “tick constrained” if the spread is at its minimum for the entire trading day. For securities trading at the current tick size of $0.005, approximately 1.6% occurred when the security was tick constrained. However, if the minimum tick size were to be increased to $0.01, 22.7% of all value traded would be tick constrained. If all of the volume which traded at a time-weighted average spread of less than $0.01 had to trade at a spread of $0.01, the incremental cost would be an additional $7.87 million, or 0.9% of all traded value for the period.1

Electronic Trading

As noted above, the October 15, 2012 amendments to UMIR introduced a new “SME” marker to be applied to orders originating from accounts which are “directionally neutral”. In many respects this marker may be seen as a proxy for accounts that access the market using automated order systems and exhibit a high order-to-trade ratio. As such, it may apply to many “high frequency traders”, but may also apply more broadly to market makers and other directionally-neutral accounts. (IIROC is presently undertaking a series of studies specifically on high frequency trading, the results of which will be released in future notices.2 )

The following graphs compare the percentage of sell volume marked as “SME” and non-SME on a downtick and an uptick in the period since October 15, 2012. As with short sellers, SME sales are more likely to execute on an uptick (17.79%) as compared to other (non-SME) sales (10.42%) and less likely to execute on a downtick (5.75%) as compared to non-SME sales (12.62%).

• 1The incremental cost is the estimate of the increased spread cost for an active investor to trade if the minimum tick size was increased.
• 2For reference to documents published by IIROC on High Frequency Trading, see http://www.iiroc.ca/Documents/2014/d37e064b- 7249-400f-9d10-46700670718f_en.pdf.