Radar meets Canada’s leading financial regulators to discuss misconduct, collaboration, and how technology is transforming their world.
Canada’s emergence as a thriving technology center has had major implications for its financial services industry and its regulators, who are grasping the nettle when it comes to overseeing a trading sector which is moving at light speed.
Montreal, Toronto and Vancouver are already celebrated global hubs for talent, but each is now seeing an influx from overseas firms and start-ups who are seeking to shield themselves from geopolitical unrest but also tap into the rich stream of local talent.
The country’s burgeoning data analytics industry has been propelled by funding and support from the banking and trading spheres, and now regulators are getting in on the act with a new AI tool soon to be deployed across the provinces as a significant part of the fight against market abuse.
The Canadian Securities Administrators (CSA), an umbrella organization of the country’s eight provincial and territorial securities regulators, is tackling more cases of market manipulation and bad actors threatening the Canadian capital markets than ever before. It has upgraded its capabilities in response.
“We live in a world that is constantly evolving, and innovation is part of this reality; as fraudsters innovate too, regulators require new strategies and the establishment of new tools and techniques to keep enforcement action effective,” said Louis Morriset, chairman of the CSA.
The CSA is replacing its proprietary marketplace surveillance technology, used in investigations of market manipulation and insider trading, with a new AI-driven model that will allow for data-driven policymaking and faster, more targeted insights.
“The new system – the Market Analysis Platform – will help the CSA achieve its mandate by providing advanced market surveillance, identifying players acting together and providing sophisticated research into market behavior,” Morriset told Radar. “This project is another good example of how CSA members collaborate to better deter, detect, disrupt, investigate and sanction violations of securities laws. In today’s world, this cooperation is more important than ever.”
The development of the AI surveillance technology has been the project of Jean-François Fortin, executive director of enforcement at the Autorité des marchés financiers (AMF), Quebec’s financial regulator.
“We clearly needed a big update, a tool that will provide us with the capacity to track the quantity of trading data that is available today,” Fortin told Radar, ‘it is certainly true for market manipulation.”
He said a priority was to detect and tackle issues such as high-frequency trading, which requires an enormous amount of data to be captured. “To figure out and build a case, demonstrating patterns of market manipulation, we needed a tool that can read the data and also analyze it,” he said.
“We will have the capacity to identify players who are acting together, but also provide more sophisticated research into the market behavior and build cases against insider trading rings or to look at certain periods of time for market manipulation purposes.”
He said all the regulators in Canada were excited at the chance of carrying out more investigations and more cross-border cases.
“Any time there is an investigation where we need information from another province they are happy to assist in active cases,” he said. “The new AI market surveillance tool is a product of that; we all worked together on that, it was something clearly everyone needed.”
Fortin told Radar that the Quebec AMF is stepping up its enforcement actions in response to greater numbers of complaints from investors, but this is also a result of having gathered more evidence of market manipulation and abuse emerging from the trading sector. He said that Quebec, and the other provinces, were also engaging firms on conduct issues and standards for senior managers but were not watering down their approach to tackling bad behavior.
“On the compliance side we do talk to firms about how they set tone,” he told Radar. “Within enforcement, we have a more formal approach. We use all the tools available to us, being able to detect whatever is available. Our message is always ‘if you act wrong you will be caught and punished’.”
He said that in Quebec it was often the case that investigations are broader than just that jurisdiction. He reports back to Morriset and the CSA monthly via its enforcement committee.
Morriset, a securities lawyer by training, is also president and CEO of the AMF. He sits on the board of the International Organization of Securities Commissions (IOSCO) along with Fortin, and both play a significant role in coordinating global risk mitigation and enforcement matters between securities regulators around the world.
Collaboration is key at every level, said Morriset, and this is increasingly evident whether it is overseas regulators sharing information on enforcement and other matters, or the provinces of Canada working together to stamp out fraud.
“Enforcement happens locally and intelligence and knowledge are shared among CSA members nationally,” he said. “Our members offer assistance to each other. If and when a threat widens, CSA members combine their efforts to enable appropriate action and better protect investors.”
In 2017/18, according to the CSA’s annual enforcement report, members gave formal assistance to one another 88 times and referred 35 files to other jurisdictions for further enforcement action, a rise over previous years.
“Collaboration against emerging threats is crucial, as evidenced by the number of formal requests for assistance and the number of referred cases between our members,” he said.
It dished out CD$69.4m in fines and penalties in 2017/18 according to the report, a jump of about CD$8m on the previous year. The majority of the fines were handed out for market manipulation, fraud, and illegal distribution of products.
The regulator told Radar that it would also chase jail sentences for fraudsters, and the courts handed down a total of 47 years of jail time in both criminal and quasi-criminal cases in 2017, compared to 39 in the previous year.
As part of its commitment to broadening its enforcement capabilities, the CSA hosted the first-ever Canadian Pump-and-Dump Summit for securities regulators and law enforcement agencies in Calgary in September 2017.
Enforcement specialists from Canada, along with the US Securities and Exchange Commission and the Federal Bureau of Investigation (FBI), came together to discuss how best to fight such schemes. In the months after the summit’s end, enforcement rose.
Other highlights include an all-out ban on binary options trading, a controversial form of trading that involves a “bet” on the performance of a currency, stock or commodity. The timeframe is typically a few minutes, and when the window closes, an investor receives a predetermined payout.
In many instances, no trading occurs and the transaction takes place for the sole purpose of stealing money, as evidenced in multiple cases across Europe. The ban was secured after the CSA approached payment networks and technology firms to cut off the flow of money to perpetrators, while stamping out advertising in a pincer move.
“Binary options were one of the fastest-growing sources of investor fraud in Canada,” Morriset said. “One interesting feature of our strategy consisted of reaching out to various involuntary intermediaries in these schemes: key technology companies like Twitter, Facebook, Google and Apple whose platforms were allowing advertising of binary options schemes that were often fraudulent and credit card companies, like Visa and MasterCard, who were involuntarily facilitating the fraudulent investments.”
He said the outreach to these intermediaries was eventually successful, as they became aware about their role, involuntary but negative, in the frauds. “This is one illustration of how innovative you need to be in enforcement to protect investors,” he said. “We’d never really banned a product in the country before. These efforts resulted in a significant reduction in the number of complaints or advertisements/activities involving binary options in Canada.”
Also in the CSA’s crosshairs is cryptocurrency, and the growth of so-called initial coin offerings (ICOs), whereby firms seeking funding can cut out the traditional venture capital route by appealing to the public for cash in return for cryptocurrency tokens rather than stock, which they claim will rise in value should the product they are selling succeed.
Again, many of the schemes have proved fraudulent, and the CSA is one of many global regulators including the SEC and the UK Financial Conduct Authority scrutinizing the markets for signs of fraud or manipulation.
It has also gone further than most other regulators, in another example of forward thinking, having converted seized bitcoins into currency.
A live case involving a suspected fraudulent ICO involved a sizeable amount of money. Once the bitcoin was frozen, the regulators had the cryptocurrency changed into Canadian dollars to protect the investors.
“I’m proud of what we have achieved under the umbrella of the CSA this past year through mutual cooperation, shared intelligence, and best practices,” said Morriset. “Internationally, we continue to be connected to other international securities regulators, which allow us to share our experiences and improve the manner in which we tackle misconduct.’’