Securities regulators on Friday approved amendments to trading rules to accommodate the introduction of an unprotected market into the trading landscape, in anticipation of the TSX Alpha Exchange adopting its new trading model next week.
The so-called Order Protection Rule (OPR) aims to protect market integrity by preventing trade throughs, requiring orders to execute with better-priced orders first. Given the possible difficulty of ensuring compliance with this requirement for orders that face speed bumps, the OSC ruled that Alpha should not be subject to this rule.
Earlier this year, the Ontario Securities Commission (OSC) approved a new trading model for TSX Alpha that, among other things, includes the introduction of a “speed bump” that will randomly delay executions; and, as a condition of approving the model, it also ruled that these orders will not be subject to order protection.
The OSC also approved amendments to the Investment Industry Regulatory Organization of Canada’s (IIROC) trading rules to accommodate the fact that, as of Monday Sept. 21, an unprotected market will be operating alongside protected markets for the first time.
According to an IIROC notice announcing the approval, the amendments to IIROC’s rules “align to proposed amendments by the Canadian Securities Administrators (CSA) regarding the interpretation of “protected order” and accommodate the terms and conditions under which the Ontario Securities Commission has approved amendments to Alpha Exchange Inc.’s trading policies to include a systematic order processing delay.”
Among other things, the rule amendments revise the definition of “protected marketplace”, and to allow traders to only consider protected marketplaces when determining compliance with trading rule requirements that make reference to “best ask price”, “best bid price” or “better price”. The amendments are effective immediately.
The most significant impact of the changes, according to the IIROC notice, is that traders will generally be able to ignore Alpha when determining compliance with certain trading rule requirements. “Generally speaking, a participant or access person may modify its systems, including automated order systems, to take account only of displayed orders on protected marketplaces,” the IIROC notice says.
However, there are a couple of circumstances when traders will still have to consider to market activity on Alpha. “Depending on the business of the participant and the available liquidity in particular securities on a marketplace that is not protected, a participant may determine that it needs to continue to consider orders on a non-protected marketplace to meet its best execution obligations,” the notice adds. Also, when executing a client order with a principal order, it says that traders should consider the price and size of orders displayed on unprotected marketplaces when determining whether the client is receiving the “best available price”.
In addition, the introduction of an unprotected, transparent marketplace will cause other trading venues to review and modify the policies and procedures that they have established to reasonably prevent trade-throughs, the IIROC says. As well, the self-regulatory organization itself will also have to make compliance and surveillance system changes to deal with the operation of transparent, unprotected marketplaces.
A separate IIROC notice says effective at the end of the trading day today, TMX Select will cease accepting orders, and there will be no open orders at the close of trading Friday. “IIROC expects that participants will make appropriate arrangements in respect of the handling of their orders upon the winding up of the operations of TMX Select,” the notice says.
The closing of TMX Select and the new model for Alpha are part of a series of changes announced last year by the TMX in an effort to stem order flow to the U.S., and to address other issues that have arisen in the Canadian trading environment in recent years.