CIRO flags routing tweak that delays small client orders and triggers more than a million in penalty
A high-speed order‑routing tweak that held back retail trades for fractions of a millisecond has cost Virtu Canada Corp. more than $1.5m in fines, disgorgement and costs.
On March 4, a hearing panel of the Canadian Investment Regulatory Organization (CIRO) accepted a settlement agreement, with sanctions, between CIRO Enforcement Staff and Virtu Canada Corp., following a hearing under the Investment Dealer and Partially Consolidated Rules.
Under the agreement, Virtu admitted that, between July 19, 2022 and May 31, 2023, it failed to immediately expose client orders of 50 standard trading units or less on a marketplace that displays orders, contrary to section 6.3 of the Universal Market Integrity Rules (UMIR).
The breach arose from Virtu’s “Routing Program”, an order handling and liquidity providing algorithm it used solely for a non‑executing Dealer Member that operates an order execution only retail business line.
The client entered into a written agreement with Virtu and consented to use of the “Routing Program” for its orders.
Virtu designed the technology to provide principal liquidity, potential price and size improvement on orders, to internalize orders and to reduce execution costs.
To achieve that, the “Routing Program” withheld the client’s orders for a short period to identify potential internalization opportunities for principal trading and determine whether Virtu would trade as principal against them.
The median time all client orders were withheld so that the “Routing Program” could be notified and respond was about 0.5 milliseconds.
However, the system also captured small retail client orders – the orders for 50 standard trading units or less – that UMIR 6.3 required Virtu, as a Participant, to immediately enter for display on a marketplace.
CIRO notes that the main policy objectives of exposing such small orders are to strengthen liquidity, to help ensure small orders that can be filled on a marketplace are not unnecessarily withheld or delayed, and to contribute to price discovery.
The UMIR 6.3 exceptions did not apply to the orders at issue.
The client used multiple executing dealers, including Virtu, to route its retail client orders.
During the relevant period, approximately 7,792,546 of the client’s retail orders went to Virtu’s “Routing Program”, which handled only that client’s flow.
If Virtu had interest, the algorithm entered a passive principal order on Omega ATS (“Omega”).
The client order then routed to look for dark liquidity and, if it was not executed, routed to Omega.
There, the client order could match with Virtu’s principal order through broker preferencing, provided neither the client nor principal order had already been filled and provided Virtu’s principal order was the same or better than the current best bid or offer.
When the client order executed against a Virtu passive order on Omega, Virtu established the rebates payable to the client.
These client–principal trades occurred as “unintentional” crosses, meaning unmatched buy and sell orders from the same Participant that interact on the marketplace.
By entering principal orders based on knowledge of the small orders and relying on broker preferencing, the “Routing Program” increased the likelihood of such matched executions.
“Broker preferencing” is described as a common feature of many Canadian equity marketplaces that lets an incoming order match and trade first with other orders from the same dealer, ahead of orders from other dealers at the same price that have time priority.
UMIR 6.3 requires that, if a Participant withholds an order subject to that rule and executes it against a principal order, the firm must provide a better price than the client could have received if the order had been executed on receipt.
“Better price”, as defined in UMIR 1.1, requires at least one trading increment of improvement (or one‑half increment in certain narrow‑spread cases) relative to the best bid or ask at the time of entry.
Virtu’s “Routing Program” did not provide a better price on certain client–principal trades.
During the relevant period, the aggregate price improvement on the small orders subject to UMIR 6.3 would have been approximately $1.7m.
The “Routing Program” did provide some price improvement on certain of the small orders of about $600,000.
In many instances, Omega displayed sufficient liquidity for the execution of the small client orders, and certain displayed orders from other Participants with time priority might have executed against those orders if they had been immediately exposed.
Virtu generated approximately $405,789.91 in revenue from trading the bid–ask spread of various securities through principal trades with the small orders.
CIRO records state that the orders at issue made up only a small proportion of Virtu’s overall client order flow, and that, according to Virtu, the “Routing Program” successfully provided principal liquidity, price and size improvement, and lower execution costs for client orders not subject to UMIR 6.3.
Virtu has no prior disciplinary history with CIRO.
Virtu itself took the “Routing Program” to CIRO.
On May 16, 2023, Virtu representatives met with staff of CIRO’s Market Regulation Policy department, at Virtu’s request, to review its order handling and liquidity provision practices relating to the “Routing Program”.
In a letter dated May 30, 2023, Market Regulation Policy expressed concerns that the “Routing Program” was not in compliance with regulatory requirements.
Virtu suspended the “Routing Program” on May 31, 2023, and has not used it since.
Under the settlement terms, Virtu agrees to a fine of $1.1m, disgorgement of $405,789.91, and costs of $25,000.
Under the settlement agreement, Virtu must pay these amounts immediately upon the hearing panel’s acceptance, unless it reaches another arrangement with Enforcement Staff.
If Virtu complies, Enforcement Staff will not initiate further action regarding the facts and contravention set out in the settlement; if Virtu fails to comply, Enforcement Staff may bring proceedings under Investment Dealer Rule 8200 based in part on those facts.
The settlement agreement is dated February 9.
The settlement becomes effective and binding on Virtu and Enforcement Staff upon acceptance by the hearing panel, and its terms remain confidential until that acceptance.
Once accepted, CIRO is required to post the settlement on its website and publish a notice and news release setting out the facts, contraventions, sanctions, and the hearing panel’s written reasons.
Virtu agrees that, after acceptance, it and anyone acting on its behalf will not make a public statement inconsistent with the agreement.
Virtu is registered as an investment dealer and is a Participant under UMIR.
