Explaining Canadian Regulation Through Hockey

Anthony Malakian, deputy editor, Buy-Side Technology

I made my bones in journalism writing about sports. One of my biggest reasons for leaving the world of sports writing was that I wanted to have my weekends and nights free to watch any number of sporting events.

So earlier this week while in Toronto, I spent about as much time chatting about hockey and curling as I did about order management systems and exchange mergers. (Shh, don't tell my bosses.)

But there was overlap. So sit back and enjoy a tale of regulation—Canada style.

Last Friday, the Canadian Securities Administrators (CSA) proposed a new set of rules that would curb high-frequency trading and electronic access.

In true Canadian fashion, the change was described to me through the use of a hockey metaphor. Prior to the 1986 National Hockey League (NHL) season, if someone on each team committed a minor penalty at the same time, each team would play one man down, or four-on-four. Just before the ’86 season began, though, the NHL enacted a rule where, despite the fact that the two men would still go to the penalty box, each team would stay at even strength with five men on the ice, or five-on-five.

The change was made to curb the greatness of The Great One, Wayne Gretzky; and the Edmonton Oilers. Prior to 1986, Gretzky had won the previous seven Hart Memorial Trophies for most valuable player, and the Oilers had won the two previous Stanley Cup championships.

The Oilers—and specifically Gretzky—were deemed to have too much of a competitive advantage over the rest of the league when it came to four-on-four play; thus, this would even the playing field.

But Gretzky, who was at this point past his prime, still went on to win two of the next three Hart Trophies and the Oilers won two of the next three Stanley Cups. What did happen, though, is that scoring around the league was down, and much of the excitement had left the game. The NHL reversed the rule back to the old four-on-four play in 1993.

The point of all this is that the unintended consequence was that the game as a whole was hurt while the perpetrators still reaped their rewards. Sound familiar?

Now back to the CSA proposal. In true hyperbole fashion, high-frequency trading, which is gaining momentum in the Canadian marketplace, is an easy whipping boy for overzealous opponents. Additionally, as happened here in the US, the practice of naked access is being directly compared to pure HFT.

The idea here is that certain banks have gained too much of an edge over the old-guard because their electronic systems are more sophisticated. The easy way to bring these players back to the pack is to play the "Risk" card. (I should also point out that the easy way to counter the "Risk" card is with the "Unintended Consequences" card.)

After the tumult of 2008, Canada earned all the praise it received for weathering the storm due to its more stringent risk controls at its banks. But the nation is at a crossroad: Does it want to continue to evolve into a sophisticated market like in the US and in England, which will ultimately lead to more lenient risk controls, or doesn't it want to remain sound at the cost of potentially falling behind other emerging markets?

The comment period ends on July 8. Feel free to use the above analogy to help your cause—for or against.

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