Market Regulation Services Inc.

Market Regulation Services Inc.

July 28, 2005 11:56 ET

Macdonald, Singh, Boyd and Dennis Sanctioned for Manipulative and Deceptive Method of Trading; RBC DS to Make Restitution to those Affected by Trades

TORONTO, ONTARIO--(CCNMatthews - July 28, 2005) - Ian Macdonald, Edward Boyd, Peter Dennis and David Singh (the Respondents) were sanctioned a total of C$312,000 today after an RS Hearing Panel approved a settlement agreement in which the four RBC DS employees admitted to having effected trades on August 11, 2004 in shares of Royal Bank of Canada and Bank of Montreal in the Market On Close Facility of the Toronto Stock Exchange, which involved no change of beneficial or economic ownership. This manipulative and deceptive method of trading is contrary to sections 2.2(1) and 2.2(2)(b) of the Universal Market Integrity Rules (UMIR), for which they are liable pursuant to UMIR 10.4(1)(a).

The RS Notices of Hearing and Statements of Allegations pertaining to the Respondents and the Notice of Hearing and Statement of Allegations pertaining to RBC DS dated May 30, 2005 and the Replies of the Respondents and RBC DS dated June 20, 2005 were withdrawn.

In addition, RBC DS has agreed to make restitution of the estimated net losses to the market participants affected.

Ian MacDonald, Managing Director, Canadian Equity Derivatives, was fined C$90,000 and must pay RS C$35,000 in costs. David Singh, Director, Canadian Equity Derivatives, and Edward Boyd, Vice President, Canadian Equity Derivatives each were fined C$60,000 plus C$20,000 in costs. Peter Dennis, Senior Equity and Derivatives Trader, was fined C$20,000 plus C$7,000 in costs.

Summary of Facts

On August 11, 2004, RBC DS and a Canadian chartered bank ("Bank A") agreed to execute trades in the shares of Royal Bank of Canada ("RY") and Bank of Montreal ("BMO") to establish hedges to over-the-counter SWAP trades. Both RBC DS and Dealer Y, who acted as agent for Bank A, were to enter the market orders into the MOC Facility on the TSX so that the RY and BMO shares in the transaction received their respective closing price levels on opposite sides of the market.

Boyd entered the RBC DS market MOC orders for RY and BMO at 12:20:53 and 12:21:13, respectively. The orders were entered for RBC DS inventory accounts.

Dealer Y failed to enter the Bank A's side of the BMO trade into the MOC Facility prior to 15:40 because it attached an improper marker when attempting to input the BMO order. Dealer Y entered the Bank A's side of the RY market MOC order but then cancelled the RY order prior to 15:40 because Dealer Y incorrectly thought that RBC DS had not entered its side of the trade into the MOC Facility, because Dealer Y was unaware that the MOC Facility was blind.

At 15:40 on August 11, 2004, large MOC Facility imbalances were broadcast on RY and BMO as a result of the entry of the RBC DS orders in the MOC Facility and Dealer Y's failure to enter the agreed upon market orders for RY and BMO shares into the MOC Facility. After the MOC imbalances were broadcast, Dealer Y responded by entering limit orders into the MOC Facility for RY and BMO shares.

After discussions amongst the Respondents concerning how they could limit RBC DS's potential liability caused by Dealer Y's errors, Singh instructed Bank A to have Dealer Y cancel the limit orders for the RY and BMO shares which Bank A told the Respondents had been entered into the MOC Facility by Dealer Y for Bank A. Boyd and Dennis then entered offsetting limit MOC orders for RBC DS inventory accounts in the shares of RY and BMO into the MOC Facility. The Respondents knew the MOC Facility allocation mechanism increased the probability that MOC imbalance orders would trade against MOC limit orders in time priority, causing wash trades, since unintentional crosses always trade first.

Just after 16:00, a substantial part of RBC DS's limit MOC orders were traded against RBC DS's market MOC orders entered earlier that day. When executed, these offsetting orders caused the RY and BMO shares to be wash traded through unintentional crosses. The Respondents knew when the limit MOC orders in RY and BMO shares were entered into the MOC Facility that any ensuing unintentional crosses would increase the likelihood of trades involving no change of beneficial ownership.

None of the Respondents contacted RS for direction after learning of the MOC imbalances and why they had occurred. The Respondents knew that it was not possible for the MOC market orders to be cancelled, which is why they considered but then did not call the TSX about cancellation. Dennis and Macdonald discussed putting in offsetting orders for Bank A through Bank A's RBC DS account. Consideration was again given to calling the TSX prior to entering the offsetting orders. Macdonald and Dennis decided not to call. The Respondents entered the offsetting orders to limit the potential liability created by the MOC Imbalance.

The impugned trades constitute an isolated incident resulting initially from an error of another Dealer. The Respondents did not engage in a pattern of manipulative or deceptive conduct. They admitted their error to RS upon being contacted immediately following the subject trades. None of the Respondents has ever before been the subject of discipline proceedings by any securities regulator. None of the Respondents benefited personally from this trading. The Respondents were acting in a very compressed timeframe to address a serious problem created by another dealer's error.

RBC DS has agreed to make restitution of the estimated net losses of $231,479.36 to the market participants who traded on the basis of the MOC Imbalance broadcast.

"It is unacceptable for a market participant to undertake a wash trade, directly or indirectly, even in circumstances where the participant is trying to correct an existing market MOC Order or to limit its liability due to an existing MOC Order," said Maureen Jensen, Vice President, Market Regulation, Eastern Region. "The Respondents agree that they should not have acted without consulting RS to mitigate potential liability. The Respondents agree that they should have contacted RS for direction as soon as they learned the reason behind the MOC Imbalance. This would have allowed for the opportunity for RS to consider what course of action was in the best interests of a fair and orderly market. They failed to consider that they were putting the interests of RBC DS ahead of the best interests of a fair and orderly market."

About Market Regulation Services Inc. (RS)

RS is the independent regulation services provider for Canadian equity marketplaces, including TSX, TSX Venture Exchange, Canadian Trading and Quotation System, Bloomberg Tradebook Canada Company, Liquidnet Canada Inc., and Markets Inc. upon commencement of its operations. RS is recognized by the securities commissions of Ontario, British Columbia, Alberta and Manitoba and by the Autorite des marches financiers in Quebec to regulate the trading of securities on these marketplaces by participant firms and their trading and sales staff. RS helps protect investors and ensure market integrity by ensuring all equities transactions are executed properly, fairly and in compliance with trading rules.

Contact Information

  • Market Regulation Services Inc.
    Doug Maybee
    Director of Communications & Public Affairs
    (416) 646-7253/(416) 627-3900
    doug.maybee@rs.ca
    www.rs.ca