Regulators are seeking comment on the initial plans for Chi-X Canada ATS Ltd.’s second Canadian trading facility.
A notice outlining plans for Chi-X’s second alternative trading system, to be known as CX2 Canada ATS (CX2), was published Thursday in the latest OSC Bulletin. Chi-X aims to have the new facility up and running in the first quarter of 2013, pending regulatory assent.
“Given the approval of the Maple transaction, we believe it is important to have a viable competitor in the market offering unique market structure and pricing schedule,” Chi-X says in the notice. “CX2 will provide existing Chi-X Canada subscribers with the opportunity to benefit from broker-preferencing while not forfeiting the use of Chi-X Canada technology, order types and features.”
Indeed, according to the notice, Chi-X is “proposing that all orders will be eligible for broker preferencing by default, with the ability for subscribers to elect to opt-out of broker preferencing on an order-by-order basis.” The option to participate in broker preferencing will also be extended to orders marked as anonymous, with matching based on the underlying broker ID, it notes.
Broker preferencing is a controversial trading practice that allows a broker’s order to be matched against orders from the same broker, without adhering the book’s normal time-priority sequence. Critics argue that violating the time-price priority system is unfair and allows big firms to further internalize their order flow. Advocates say that allowing for efficient internalization reduces costs and prevents the creation of in-house internalization mechanisms.
The notice says that OSC staff are not aware of any other visible equity marketplace in Canada that allows anonymous orders to benefit from participation in broker preferencing. As a result, it’s seeking specific comment on whether CX2 should be permitted to extend broker preferencing to apply to those orders that are marked anonymous “and whether this practice raises public interest concerns”.
The notice also indicates that the new ATS will operate independently of Chi-X’s existing facility, and there will be no obligation to subscribe to both. It will support trading in all Canadian equity securities, starting with TSX and TSX Venture listed securities. And, in addition to basic market, limit and short orders, it will also offer a variety of advanced order types, including intentional cross orders, basis trade crosses, iceberg orders, and a VWAP cross, among others.
Comments are due by December 10.