Canada Reviews Order Protection Rule

Terry Flanagan

On May 15, Canadian securities regulators proposed amending the Order Protection Rule to make it easier for marketplaces to ignore, or “trade through,” quotes from other marketplaces that failed to meet a minimum volume threshold.

A review of OPR by the Canadian Securities Administrators (CSA) led it to publish for comment proposed amendments to National Instrument 23-101 Trading Rules. Concerns were raised by market participants that the costs and inefficiencies of the current OPR framework outweighed the benefits of full protection of displayed orders across all Canadian marketplaces.

“I think everyone’s got their head down, preparing to comment on the CSA proposal primarily on the order protection rule,” Sean Debotte, president and CEO of Omega Securities, told Markets Media. “In Canada it’s quite different from the states in the sense that Reg NMS basically only protects top of book, whereas in Canada, we protect all visible quotes on all visible protected marketplaces.”

Sean Debotte, Omega ATS

Sean Debotte, Omega ATS

OPR in its current form was finalized in 2009 and implemented in 2011 in response to the rapid evolution of the Canadian equity market.

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.

“Under the OPR amendments, orders would be protected where displayed on a marketplace that has met certain criteria. This would have the effect of leaving displayed orders on some marketplaces unprotected by OPR,” the Ontario Securities Commission said in May. “We are also proposing or considering caps or limits on certain trading fees and data fees, as well as outlining and seeking feedback about action being proposed regarding the payment of rebates by marketplaces to their members or subscribers under the maker-taker pricing model.

The 5% threshold over a one-year period is “a little overly exuberant when Sifma in the states is calling for a 1% barrier for three consecutive calendar quarters,” said Debotte. “We think that that debate is going to be a deep one. Whether or not venues should be excluded from the protected quote, from the NBBO, and what kind of sub-micro structure that’s going to lead to will be a serious topic for discussion between all broker-dealers and all marketplaces.”

Four of the eight visible markets in operation as at the end of 2013 (Alpha, Chi-X, TSX, and TSXV) would have met the five percent threshold based on the average of the volume and value of adjusted trades, according to CSA. One additional marketplace that did not meet the threshold and is a recognized exchange (CSE) would have also been considered a protected market, but only for its listed securities.

The CSA also found that slightly over 90% of the volume and value of adjusted trades would have occurred on what would have been considered to be protected markets.

Some Canadian broker-dealers, especially those that have never embraced fragmentation, “think that by excluding some marketplaces they can go back to the ‘good old days’ of nickel spreads and a 125-year-old monopoly marketplace,” Debotte said. “A lot of participants think fragmentation is a good thing, and that we live in a golden age for the retail investor, and it’s come about, especially in Canada, due to our policies on things like order protection and transparency.”

More transparency and order protection are important parts of the Canadian trading micro structure, and the proposed threshold will only add an unnecessary level of complexity to this structure, he added.

Featured image via Matthew Benoit/Dollar Photo Club

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