Wednesday, July 05, 2006

TD Securities Fined $350,000 by RS

  
Firm failed to transmit CNQ orders from TD Waterhouse

Investment Executive, 5 July 2006

A Market Regulation Services Inc. (RS) hearing panel today approved a settlement agreement with TD Securities Inc., relating to best execution of client orders, exposure of client orders, audit trail violations, retention of records and supervision issues. TD Securities was fined $350,000 plus $80,000 in costs.

The settlement concerned TD Securities’s handling of hundreds of retail client orders for TD Waterhouse Inc. most of which were outside the posted quote for the CNQ marketplace in the period December 2003 to January 2005.

At the time CNQ was launched in mid 2003, TD Waterhouse made the business decision that only its discount clients would be eligible to enter buy and sell orders on CNQ. Other TD Waterhouse clients would only be permitted to liquidate existing positions. TD Securities became a CNQ dealer to facilitate this trading.

Prior to February 2005, only Designated Market Makers could enter non-matching orders, and orders outside and also between the posted quote. An investment dealer which was not a Designated Market Maker for CNQ could only enter orders which matched a displayed bid or offer or execute a cross at any price between the bid and offer. In the Relevant Period, TD Securities used Dealer A, a CNQ Market Maker, to enter client orders for TD Waterhouse that were non-matching, and outside or between the posted quote. Dealer A did not charge TD Securities for this service.

TD Securities began trading CNQ securities in December 2003. TD Waterhouse client orders were entered into the TD Securities ISS/OSS system when received from the client. Until December 2004, these orders were routed to a printer on the retail trading floor at TD Securities and retrieved by a trader designated for CNQ trading. Thereafter, the trader was provided with a dedicated printer to receive these orders.

RS’s investigation disclosed that the trader’s CNQ order management methodology was ineffective and resulted in TD Securities repeatedly failing to transmit TD Waterhouse client orders to Dealer A for order entry. Such orders expired unfilled without ever being entered onto CNQ, in breach of TD Securities’s best execution obligation.

TD Securities also failed to comply with audit trail requirements.

In addition, the investigation was hampered because neither TD Securities nor TD Waterhouse maintained a separate trading blotter for CNQ trading. This practice, combined with the incomplete audit trail, made it extremely difficult for RS to determine exactly how many best execution, order exposure and audit trail violations occurred. However, based on TD Securities’s own estimates of the number of orders received and purportedly monitored, there were at least between 200-500 orders held back from order entry on CNQ.

TD Securities’s order handling methodology deprived CNQ of some liquidity and transparency. Many of the client orders withheld by TD Securities were for CNQ’s most actively traded stocks by volume and value.
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