A proposed new order type that Cboe Canada sought to introduce for its MATCHNow trading book — which would have allowed dealers and traders to specify who their orders interact with — has been scrapped after regulators concluded it would have violated fair access principles.
Last October, the Ontario Securities Commission (OSC) launched a consultation on a proposed rule change to allow a directed indication of interest (IOI) on MATCHNow. This order type would have let buy-side dealers specify which clients could receive directed IOIs, and allowed those clients to filter incoming messages based on liquidity type.
According to the regulator, most consultation feedback argued that the proposal violated the “fair access” principles in trading rules, which require that markets do not “unreasonably” limit access to their services or discriminate among participants.
“The majority of commenters were of the view that the directed IOI proposal violates fair access principles and that the level of discrimination is unreasonable because the proposed functionality would lead to an increase in market segmentation and silos of liquidity among a small number of large dealers where order flow is already highly concentrated,” the OSC reported.
While some supported the proposal, saying it could bring efficiencies and was consistent with the historic market structure — namely the “upstairs market” among large dealers — the OSC noted that dealers are not subject to the same fair access requirements as marketplaces.
Ultimately, the regulator sided with critics, stating: “In our view, the directed IOI proposal is inconsistent with [the fair access] principle because it specifically provides the ability for a Cboe Canada member, or a client of a Cboe Canada member, to choose the counterparties and certain attributes of orders with which they wish to interact and ultimately trade against, which represents an unreasonable condition and limitation.”
The OSC noted it has expressed similar concerns about a 2010 proposal from another market that would have restricted interaction of orders with certain players. It also said Cboe’s proposal differs from existing trading models, which do not explicitly exclude participants.
“In our view, the directed IOI proposal expands on the differentiation of marketplace access that is currently permitted, by allowing the users to specifically choose the nature of their counterparty,” the regulator said.
As a result, the OSC did not recommend approval of the new order type, which is “deemed to be withdrawn based on the time that has elapsed.”