The Investment Industry Regulatory Organization of Canada is proposing new guidance to help firms fulfill their best execution obligations in an evolving equity market structure.

IIROC is seeking to issue guidance concerning the use of certain order types in the context of recent developments in Canadian market structure, such as the introduction of multiple marketplaces; the increased prevalence of high speed/high frequency electronic trading; increased order to trade ratios, and the corresponding increase in message traffic; smaller average execution size; and the potential for periods of increased market volatility.

“In this increasingly fast-paced environment, the way a participant manages its order flows and routing decisions can materially impact the quality of trade execution. The failure to properly manage order flows can result in unanticipated and undesirable order execution outcomes,” it says.

The draft guidance is in two parts. The first part deals with bligations relating to the management and handling of order flow. It contemplates:
> how firms should ensure that order routing decisions comply with ‘best price’ and ‘best execution’ obligations;
> how orders should be managed when not all marketplaces are open and available for trading; considerations when deciding where to ‘book’ an order if multiple markets are open for trading at the same time;
> the obligations of a participant who uses a third party vendor for order routing; how a firm should handle ‘stop loss’ orders in fast moving markets; and
> the obligations a participant has to a ‘discount client’ concerning the order type selected for use by a client.

The second part of the draft guidance deals with the use of certain order types. It examines:
> whether market orders or limit orders should be used in today’s more complex markets;
> whether a ‘stop loss’ order will prevent losses in fast moving markets;
if ‘all or none’ orders be used to guarantee a fill of an order at a specific price in volatile markets; and
> if there’s an order type that can ensure that an exchange-traded fund trades near its net asset value in volatile markets.

Comments on the proposed guidance is due by Jan. 31, 2011.

IE