02.26.2015
By Terry Flanagan

Canada Order Protection Revamp Lies Ahead

Canadian regulators are mulling whether to impose a minimum market share size of 5% for trading venues to be afforded trade-through protection, which is similar to a proposal put forward by Bats Global Markets in the U.S. The idea is controversial, because it could be viewed as stifling competition for established exchanges.

“We are going to reject the notion of a minimum threshold, which Bats has thrown out and is a tremendous proposal for Bats,” said Doug Clark, managing director at Investment Technology Group. “The argument that, ‘We’re already above 1% on all of our venues, so don’t give trade through protection to any small venue like a new IEX lit market’ is a terrible idea. If you have a new venue that actually has some value added, you make it impossible for them to gain traction.”

A review of OPR by the Canadian Securities Administrators led it to publish for comment proposed amendments to National Instrument 23-101 Trading Rules on May 15, 2014. The proposed amendments would establish a market share threshold of five per cent, at or above which a marketplace’s displayed orders are protected under OPR. Exchanges that do not meet the threshold will be protected only for their listed securities. The amendments would also mandate specific dealer disclosure relating to best execution policies.

Canadian regulators, said Clark, “are very aware of the fact that some of the new venues that show up have absolutely no value add, they’re just copy, cut, and paste and they’re trying to survive off of data fees. That’s why they wanted to do to this minimum threshold, but the dealer community has pushed back and just said, ‘You’re basically putting a moat around the TSX monopoly and nobody’s ever going to compete with them. They’re already too expensive. If you make it a monopoly for life, we’ll never get anything done.’”

In a report, Clark said that “the regulators, concerned that Chi-X 3, Omega 3, or Aequitas 4 will impose undue burden on the Street, will throw dealers some kind of a bone in the form of greater discretion to ignore small markets.”

Marketplace trading fee caps will take effect by mid-summer, Clark predicted, adding that the cap of active take fees in line with U.S. rates of 30 mils per share is the least controversial proposal and will be the first enacted.

The capping of fees at 30 mils, which is what the U.S. has had since NMS went into effect, will happen by the end of Q2,” he said. “But at the same time in the U.S., you are already talking about much lower fees, so we’re years behind you on that.”

Featured image via Matthew Benoit/Dollar Photo Club

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