The Canadian Securities Administrators today released a discussion paper and announced a public forum to discuss market structure developments and trade-through obligations.

Earlier this year, Market Regulation Services Inc. called on regulators to extend existing trade-through obligations to cover all market players. It was concerned that gaps in the current rules and new trading mechanisms could allow institutional investors to disadvantage retail investors by trading through their orders. The CSA declined to do this, deciding instead to wait and see whether trade throughs become a problem with the introduction of new trading systems. The CSA is now seeking comment on the issue.

Trade-through protection forces market players to fill better-priced orders first, even though they may prefer to execute at an inferior price for some reason, such as faster or more anonymous execution.

The issue isn’t just a hot one in Canada. The U.S. Securities and Exchange Commission recently voted to extend trade through obligations to its electronic markets in a contentious vote. This decision was in turn cited as one of the factors motivating the NYSE’s decision to buy electronic trading platform Archipelago Holdings Inc., and seek a public listing.

The CSA paper notes that the current debate over trade-through rules has its roots in the introduction of new marketplaces in Canada, the proliferation of direct market access to new types of trading participants, new facilities to accommodate block trading and rapidly changing technology. It says that, “The regulation of the capital markets must strike a balance between encouraging innovation and creating a capital market that is fair and unbiased.”

“We encourage comment from all participants in the capital markets on this important issue. The outcome of this debate will shape the future of Canada’s capital markets, and as a result, we feel the debate should be transparent and that all interested parties should have a chance to voice their opinions,” it says.

“We look forward to working with marketplace participants, marketplaces and other regulators in implementing a solution that provides flexibility and fairness for all market participants.”

“As we committed earlier this year, we are initiating a discussion to consider market structure issues and specifically, the role of the trade-through obligation,” said Randee Pavalow, director Capital Markets at the Ontario Securities Commission. “As part of the discussion, we believe it is important to identify the objectives we are trying to achieve and any problems that we are trying to avoid or minimize. We want to hear broadly from market participants about these issues that are fundamental to the structure of our capital markets.”

The paper invites comments on 31 specific questions by October 20. The CSA have also scheduled a public forum in Toronto on October 14, “to permit all interested parties to participate in the discussions relating to trade-through protection.”