Canadian securities regulators heave published a notice outlining a variety of market structure issues it is considering, and possible regulatory responses.

Friday’s joint staff notice from the Canadian Securities Administrators and the Investment Industry Regulatory Organization of Canada doesn’t propose any new rules in response to these developments, although it does highlight their thinking on a number of issues, and it says that a variety of market structure issues will be studied further. Some of these issues were raised in a concept paper published last year by the CSA and IIROC, and were discussed in a forum held earlier this year, on the emergence of dark pools and other trading innovations.

In particular, regulators are:

– considering additional transparency requirements for marketplaces;
– reviewing the practice of sub-penny pricing;
– reviewing new order types proposed by marketplaces;
– reviewing fees charged by marketplaces, including data fees;
– reviewing electronic trading, including direct market access; and
– monitoring the impact of high frequency trading on the Canadian market.

In the notice, the regulators indicate that they will address the issue of broker preferencing. “We do believe that at the outset, more transparency is required so that market participants understand how all trading options offered by the marketplaces function. CSA staff are considering requiring that marketplaces provide specific disclosure on their websites on how orders entered on a marketplace interact with other orders on that marketplace throughout the day, including a detailed description of each order type,” they say.

This proposal will be part of a package of amendments to the trading rules that will deal with updating the regulatory regime for alternative trading systems, the notice states. CSA staff anticipate that the amendments will be published for comment by the fall.

CSA and IIROC staff will also be monitoring the initiatives taken in the U.S. with respect to the use of ‘indications of interest’ by markets. “CSA staff believes that enhanced transparency of marketplaces’ practices regarding the dissemination of information respecting orders and trades, including the provision of IOIs, will also address some of the concerns raised,” it says, adding that CSA staff are also considering providing clarification on the definition of an order and what features would qualify an IOI as an order.

In other areas, CSA staff are assessing whether the use of marketplace-owned smart order routers, which take into account hidden liquidity available on their own book, gives that marketplace an unfair advantage over other marketplaces and SORs. “CSA staff are also considering the impact that this practice has on investors and will be examining whether marketplaces that provide information on hidden liquidity to their proprietary SORs should be required to provide the same information to other third-party SORs in order to meet the fair access provisions,” the notice states.

“We will examine the issue of sub-penny pricing with the goal of assessing how any changes in either printing or quoting in subpennies would impact both the market as a whole, and the individual participants. Additionally, we will consider both transparent and dark markets, and whether principles of fairness would allow both types of venues to offer sub-penny price improvement and printing or execution, or whether different market structure models necessitate different treatment,” the regulators say.

In terms of the evolution in electronic trading, the notice says that CSA and IIROC staff have embarked on a broad review of electronic trading in Canada, including direct market access practices, “with a view to assess what requirements are needed to address credit risk, market risk and systemic risk to the Canadian market. The objectives of the review of electronic trading include assessing what controls, filters and other mechanisms marketplaces and market participants should have to prevent errors at the order-entry stage and, in general, to promote fair and orderly markets.”

Also, as a result of the market volatility experienced on May 6, the regulators say they have expanded the scope of the project to include the examination of other electronic trading issues, including the need to standardize the volatility parameters used by Canadian marketplaces in times of extreme volatility.

In terms of high frequency trading, regulators say they “continue to monitor developments in this area, and particularly recent initiatives in the U.S. aimed at reviewing short-term trading strategies and their impact on the market”; adding that a review of issues associated with high frequency trading is included in the project to examine electronic trading overall.

IE