CSA consider reducing scope of order protection rule regime

May 20, 2014

On May 15, the Canadian Securities Administrators published for comment proposed amendments to trading rules intended to address the costs and inefficiencies associated with the current order protection rule framework.

The order protection rule, which came into effect in 2011, requires marketplaces to establish and ensure compliance with policies and procedures designed to prevent trade-throughs on that marketplace. The protection is intended to ensure that all immediately accessible, visible, better-priced limit orders are executed before inferior-priced limit orders and are not traded through.

While the CSA believe that the rule enhances confidence in the fairness and integrity of the market, the fragmentation of order flow across multiple marketplaces has led to increased complexities and costs for market participants. For example, some dealers may pay more in respect of membership or subscriber fees to access certain marketplaces than the total amount invoiced for trades on that marketplace, while the technology costs and risks of managing connections to multiple marketplaces can also impose a significant burden. Meanwhile, the CSA noted that the rule may lead to trading inefficiencies by providing incentives for the launch of new marketplaces or by supporting the viability of existing marketplaces that would not otherwise exist.

In light of these concerns, the proposed amendments to NI 23-101 Trading Rules would reduce the scope of the order protection rule by limiting order protection to marketplaces that meet a certain threshold. Specifically, the displayed orders on a marketplace that enjoys a 5% market share of the adjusted share volume and value of trades would be protected. Based on 2013 market share, displayed orders on the TSX, TSX-V, Alpha and Chi-X would be protected, while those on TMX Select, Omega, CX2 and CSE would not be. The displayed orders of a recognized exchange that did not meet the market share threshold, however, would be protected with respect to those securities listed and traded by the exchange.

While the order protection rule remains a "fundamental part" of the regulatory regime, the CSA believe the reduced scope of the rule would give dealers the flexibility to determine when and if to access trading on certain marketplaces to achieve best execution for clients while still satisfying the objectives of the rule. According to the CSA, the proposed threshold would result in capturing at least 85-90% of the volume and value of adjusted trades. The proposal would also provide for limits on certain trading fees, while introducing a plan to study the impact of disallowing the practice of rebate payments by marketplaces. Further action to regulate certain market data fees is also being considered. 

The CSA are accepting comments on the proposal, including specific questions asked in the request for comment, until September 19, 2014.

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