Canadian commodities lobby group takes aim at “predatory” short sellers
02 December 2019 Toronto
Image: Shutterstock
Canada’s TSX Venture Exchange is considering re-introducing an uptick rule that would restrict traders to only shorting a stock if it was on an upward trajectory.
The rule would apply to stocks of companies in the ‘junior markets’, meaning listed companies under CAD 250 million.
A similar rule existed in Canada until 2012 but it was scrapped after market research found that it was not an effective tool for restricting significant and rapid systemic declines in prices.
Due to this and other research on Canadian short selling, the rule was removed for all 14 of Canada’s trading venues by the Investment Industry Regulatory Organization of Canada (IIROC).
Now, an anti-short selling group representing the Canadian mining industry is lobbying the IIROC and the country’s exchanges to revive the rule to protect smaller participants against what it describes as "predatory short selling".
The Save Canadian Mining (SCM) advocacy group has also proposed banning short selling of junior market companies but would settle for the return of the uptick rule.
According to the group, short selling activities on stocks from junior markets increased after 2012 and now there is a dynamic where “short selling activities, high-frequency trading, and algorithms are ‘exploiting’ the lack of a tick test to the detriment of Canada’s junior markets”.
Terry Lynch, CEO of ChileanMetals, who founded SCM last month alongside several other commodities market participants, described in a statement how “for smaller cap mining companies, short selling activity spooks true investors into selling prematurely, effectively stunting the growth of these businesses at critical early stages”.
“SCM is dedicated to helping ensure Canada’s capital markets remain viable for junior miners now and into the future,” he added.
The group also wants to secure a public commitment from investment banks to allow listed companies to sell private placements to brokers without having to be approved by a named committee.
According to SCM, brokers have a fiduciary responsibility to act in their clients best interest, which should govern whether or not they’re able to have their investors in private placements. They should also receive compensation similar to the fees they get from participating in an initial public offering, the group argues.
Responding to the group's claims, the head of TSX Venture Exchange, Brady Fletcher, highlighted that “the practice of short selling plays a role in maintaining a healthy, efficient market,” but went on to note that the exchange “understands that certain changes to market operations in Canada, specifically related to the removal of the tick test, may have had unintended negative consequences for our junior, or more illiquid issuers”.
Fletcher confirmed that the exchange is working with SCM and other industry stakeholders to engage Canada’s regulators in evaluating the reinstatement of a tick test.
The question of a new uptick rule was raised earlier this year at a TSX Venture Exchange roundtable discussion where it was debated whether shorting rules should be tied to the liquidity and/or size of companies, to restrict short selling in illiquid securities.
Elsewhere, SCM is seeking to drum up support with an online petition and has already gathered support from several commodities industry associations and junior market participants.
The IIROC is yet to respond to questions regarding SCM’s claims.
The rule would apply to stocks of companies in the ‘junior markets’, meaning listed companies under CAD 250 million.
A similar rule existed in Canada until 2012 but it was scrapped after market research found that it was not an effective tool for restricting significant and rapid systemic declines in prices.
Due to this and other research on Canadian short selling, the rule was removed for all 14 of Canada’s trading venues by the Investment Industry Regulatory Organization of Canada (IIROC).
Now, an anti-short selling group representing the Canadian mining industry is lobbying the IIROC and the country’s exchanges to revive the rule to protect smaller participants against what it describes as "predatory short selling".
The Save Canadian Mining (SCM) advocacy group has also proposed banning short selling of junior market companies but would settle for the return of the uptick rule.
According to the group, short selling activities on stocks from junior markets increased after 2012 and now there is a dynamic where “short selling activities, high-frequency trading, and algorithms are ‘exploiting’ the lack of a tick test to the detriment of Canada’s junior markets”.
Terry Lynch, CEO of ChileanMetals, who founded SCM last month alongside several other commodities market participants, described in a statement how “for smaller cap mining companies, short selling activity spooks true investors into selling prematurely, effectively stunting the growth of these businesses at critical early stages”.
“SCM is dedicated to helping ensure Canada’s capital markets remain viable for junior miners now and into the future,” he added.
The group also wants to secure a public commitment from investment banks to allow listed companies to sell private placements to brokers without having to be approved by a named committee.
According to SCM, brokers have a fiduciary responsibility to act in their clients best interest, which should govern whether or not they’re able to have their investors in private placements. They should also receive compensation similar to the fees they get from participating in an initial public offering, the group argues.
Responding to the group's claims, the head of TSX Venture Exchange, Brady Fletcher, highlighted that “the practice of short selling plays a role in maintaining a healthy, efficient market,” but went on to note that the exchange “understands that certain changes to market operations in Canada, specifically related to the removal of the tick test, may have had unintended negative consequences for our junior, or more illiquid issuers”.
Fletcher confirmed that the exchange is working with SCM and other industry stakeholders to engage Canada’s regulators in evaluating the reinstatement of a tick test.
The question of a new uptick rule was raised earlier this year at a TSX Venture Exchange roundtable discussion where it was debated whether shorting rules should be tied to the liquidity and/or size of companies, to restrict short selling in illiquid securities.
Elsewhere, SCM is seeking to drum up support with an online petition and has already gathered support from several commodities industry associations and junior market participants.
The IIROC is yet to respond to questions regarding SCM’s claims.
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