ATSs Face Price Improvement Mandate

Terry Flanagan

Canadian regulators are proposing a price improvement requirement to limit broker-dealers’ use of alternative trading systems to execute trades without displaying quotes.

Under proposed revisions to the Universal Market Integrity Rule (UMIR) published by the Investment Industry Regulatory Organization of Canada (IIROC), dark pools and transparent marketplaces that permit dark orders or icebergs with less than one standard trading unit being displayed would be required to provide meaningful price improvement of at least one trading increment (or in cases where the displayed market has a spread of only one trading increment, at least one-half of a trading increment) to others (other than “large orders) that execute with dark orders.

ITG Canada operates the Match Now dark pool, which gives clients the option of providing 20% or 50% price improvement. “We already have orders trading within the parameters of the proposed guidelines, but they would take away those clients that want to offer just 20% of the spread,” Doug Clark, head of research at ITG Canada, told Markets Media.

Currently, Canadian dark pools must provide price improvement of at least a tenth of a penny, while dark pools in the U.S. often provide no price-improvement, relying on their anonymity and lower execution fees to draw orders from displayed markets.

The proposal would enable regulators to put a minimum size requirement into place in relatively short order, with little input from the industry. However, it provides little detail on how regulators would determine the threshold or when could be implemented.

Although only about 5 percent of stocks listed in Canada, or about 300 stocks, are listed on exchanges in both the U.S. and Canada—and could therefore see trading in their shares shift across the border–they make up about 70 percent of the value of stocks traded in Canada, said Clark.

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