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The New World of Multiple Securities Marketplaces in Canada

The New World of Multiple Securities Marketplaces in Canada. Simon Romano Raman Grewal Stikeman Elliott October 5, 2011. The New World of Multiple Marketplaces. Agenda. ATSs in Canada What is an ATS? Who are the players? Issues and Opportunities ATS Regulations ATS Rules IIROC and TSX

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The New World of Multiple Securities Marketplaces in Canada

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  1. The New World of Multiple Securities Marketplaces in Canada Simon RomanoRaman Grewal Stikeman ElliottOctober 5, 2011

  2. The New World of Multiple Marketplaces Agenda • ATSs in Canada • What is an ATS? • Who are the players? • Issues and Opportunities • ATS Regulations • ATS Rules • IIROC and TSX • Upcoming Changes • Q&A

  3. PART 1ATSs in Canada

  4. ATSs in Canada 1 What is an ATS? • electronic trading system • automated trade matching • electronic process to buy and sell orders • multiple buyers and sellers • predetermined, non-discretionary trading methods

  5. ATSs in Canada 1 What is NOT an ATS? • one-on-one systems (eg. equity offerings) • non-binding indications of interest (IOIs) that require further negotiation to produce a trade

  6. I. ATSs in Canada ATSs in Canada 1 Advantages • “alternative trading systems” alternative to traditional exchanges • broader trading options and strategies • different pricing • customized services • access to markets

  7. I. ATSs in Canada ATSs in Canada 1 Types of ATSs • Auction markets • Call markets • Crossing systems/networks • Dark pools • Market makers • - continuous matching and execution - orders aggregated and executed in intervals - do not discover prices but allow crosses by buyers and sellers who quote on other markets - no pre-trade transparency - liquidity providers continuously quote bid and ask prices for immediate execution

  8. I. ATSs in Canada ATSs in Canada 1 Equity ATSs in Canada • Alpha ATS • Bloomberg Tradebook Canada • Chi-X Canada • Instinet Canada Cross (ICX) • Liquidnet Canada • MATCH Now • Omega • Pure • TMX Select • Sigma X

  9. 1 ATSs in Canada The Canadian Market – Equity ATSs BLOOMBERG TRADE BOOKCANADA RETAILCLIENTS LIQUIDNETCANADA DataConsolidation BROKERS INSTITUTIONS DATAVENDORS Smart Order RoutingBest Ex MATCH Now OMEGA IIROC Cross-MarketSurveillance OPR,Trading Costs & Speed PURETRADING TSX TMX Select Clearing &Settlement CDS Chi-X Instinet ALPHA Sigma X With thanks to Tracey Stern of the OSC

  10. I. ATSs in Canada ATSs in Canada 1 Market Share

  11. I. ATSs in Canada ATSs in Canada 1 New Players • Sigma X Canada • Launch announced by Goldman Sachs Canada in August, 2011 • TMX Select • Commenced trading in July, 2011

  12. I. ATSs in Canada ATSs in Canada 1 Issues (Opportunities) • Dark Pools Purpose: • Liquidity • Execution • Reduced trading costs due to less information leakage Issues: • Pre-trade transparency generally required • Cloak of darkness designed to, among other things, control market impact costs

  13. I. ATSs in Canada ATSs in Canada 1 Issues (Opportunities) • Dark Pools and Dark Orders, Issues cont. • Can be fully or partially “dark” • Icebergs (reserve orders)

  14. I. ATSs in Canada ATSs in Canada 1 Issues (Opportunities) • Pegged Orders (reference-priced) • Algorithmic Trading • High Frequency Trading (HFT) • Flash Trading • Co-location

  15. I. ATSs in Canada ATSs in Canada 1 Issues (Opportunities)

  16. I. ATSs in Canada ATSs in Canada 1 Issues (Opportunities) • Some Issues raised: • Fragmentation • Price Discovery • Liquidity • Internalization • Costs • Market Integrity

  17. I. ATSs in Canada ATSs in Canada 1 Issues (Opportunities) • Some Issues raised • Specific Dealer/marketplace obligations: • Best price • Price-time priority • Best execution • Order protection

  18. PART 2ATS Regulation

  19. II. ATS Regulation I. ATSs in Canada ATS Regulation 2 • Securities Acts N1 21-101/N1 23-101 = ATS Rules N1 31-103 – Dealer and Advisor Registration and Requirements SRO – UMIR/Dealer Member Rules RSP (Regulation Services Provider) CSA • - DIAGRAM IlROC Exchanges QTRS ATS (None at present)

  20. II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2 ATS Rules – NI 21-101 and NI 23-101 • NI 21-101 – Largely operational and administrative • NI 23-101 – Substantive trading rules • Introduced in 2001 - exchange dominated environment • Continue to evolve to reality of multiple marketplaces • Currently subject to further amendments • Also subject to NI 24-101 governing trade matching and settlement

  21. II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2 ATS Rules – NI 21-101 • Rules Applicable only to ATSs • Rules Applicable only to Exchanges and QTRSs • Rules Applicable to all marketplaces

  22. II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2 ATS Rules – NI 21-101 • defines “marketplace” and “ATS” • ATS, like exchange: • brings together multiple buyers and sellers of securities using established, non-discretionary methods • ATS, unlike exchange – does not: • Require issuer to agree to have securities listed • Guarantee two-sided market • Govern conduct of subscribers (maybe) • Discipline subscribers

  23. II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2 NI 21-101 - Rules Applicable only to ATSs • Registration – shall not carry on business unless • Registered as dealer • SRO member (IIROC) • Compliant with ATS Rules (NI 21-101 and NI 23-101) • Can trade only in: • Exchange-traded securities • Corporate or government debt • Foreign exchange-traded securities (opportunity)

  24. II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2 NI 21-101 - Rules Applicable only to ATSs • Reporting • Threshold “trigger” notifications • Confidentiality protections • Risk Disclosure

  25. II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2 NI 21-101 - Rules Applicable only to ATSs • Clearing and Settlement • trades reported and settled through clearing agency • dealer (subscriber) or ATS decide who reports to clearing agency

  26. II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2 NI 21-101 - Rules Applicable only to Exchanges and QTRSs • Must apply for “recognition” (if granted, recognition order sets out additional requirements, including governance, financial statements, financial covenants, technology, etc.) • Reporting to CSA • Establish “compliance” rules • Rules • Not contrary to “public interest” • Cannot “unreasonably” discriminate among clients, issuers and members • Filing procedure • Can self-regulate, but to date all use IIROC as their RSP

  27. II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2 NI 21-101 - Rules Applicable to all marketplaces • S. 5.1/5.2 and 6.12/6.13 - Fair Access ** • Part 7 and 8 - Transparency ** • Part 10 - Fees • Part 11 - Record Keeping • Part 12 - Systems • Part 14 - Information Processor

  28. II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2 NI 21-101 - Rules Applicable to all marketplaces • Fair Access • Must establish written standards for granting access • Not unreasonably prohibit, condition or limit access • Keep records of access granted • Cannot restrict trading on other marketplaces

  29. II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2 NI 21-101 - Rules Applicable to all marketplaces • Transparency • Provide information to “information processor” (IP) • Pre-trade - required for all displayed “orders” • Post-trade – required for all trades • IP to produce consolidated real-time feed • Marketplace must comply with IP’s requirements

  30. II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2 NI 21-101 - Rules Applicable to all marketplaces • Pre-Trade Transparency – Issues • What is an “order” • When is an indication of interest (IOI) an order • When is order “displayed” • Specific issues for Dark Pools and Dark Orders, among others

  31. II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2 NI 23-101 – Trading Rules • Application • 23-101 vs. IIROC (UMIR) • SRO/RSPJurisdiction – through monitoring and enforcement requirements • Jurisdiction over ATS and its Subscribers via “contractual agreements” required with RSP

  32. II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2 NI 23-101 – Trading Rules • Prohibits • manipulation and fraud* • Requires • best execution* • order protection* • audit trail * Do not apply under N1 23-101 if person complies with similar rules of an exchange, QTRS or RSP

  33. II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2 NI 23-101 – Trading Rules • Best Execution • Must make “reasonable efforts” to achieve best execution when acting for client • Includes making “reasonable efforts” to use facilities providing information on orders and trades • Enforcement actions against dealers for failing to connect to new ATSs • Does not apply under N1 23-101 to dealer that is an ATS complying with N1 21-101.

  34. II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2 NI 23-101 – Trading Rules • Best Execution • price, speed, certainty and overall cost order size, reliability of quotes, liquidity, market impact and opportunity costs

  35. II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2 NI 23-101 – Trading Rules • Order Protection Rule • Includes • trade-throughs • locked or crossed markets • anti-avoidance

  36. II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2 NI 23-101 – Trading Rules • Order Protection Rule • Requires each marketplace to establish and comply with policies and procedures designed to prevent trade-throughs on that marketplace, subject to certain exceptions • Certain trades are exempt from trade-through restrictions, including where there is technology failure as well as non-standard, calculated-price and closing-price orders • Marketplace participants (dealers) – cannot enter directed action orders (DAOs) without having and complying with policies and procedures to prevent trade-throughs

  37. II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2 NI 23-101 – Trading Rules • Order Protection Rule, cont. • Directed action orders (DAOs) - limit order for purchaser or sale of an exchange-traded security that: • when entered or routed to a marketplace is to be: • immediately executed against a protected order (remainder booked or cancelled), or • placed in order book, • is marked as a DAO, and • is entered or routed at the same time as one or more additional limit orders entered or routed to one or more marketplaces to execute against any protected order with a better price

  38. II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2 NI 23-101 – Trading Rules • Best Execution and Order Protection Intersection with Price-Time Priority

  39. II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2 IIROC and TSX • Dealers regulated by IIROC under Dealer Member Rules • Dealers and marketplaces regulated by UMIR • ATSs directly regulated by IIROC as both dealers and marketplaces • ATSs and ATS subscribers required to submit to and comply with RSP requirements • UMIR evolved over time – stretches to apply in multiple marketplace environment

  40. II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2 IIROC and TSX • TSX rules apply to TSX participating organizations (POs) - extended via TSX Rule Book to apply to those related POs • Operation of a proprietary electronic trading system (PETS) by a PO also subject to TSX rules and limited to trading orders of greater than 1,200 units (or $10K for debt security) • Requires integration with TSX’s order book • Can impact dealers’ ability to establish in-house or affiliated ATSs

  41. II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2 Upcoming Changes • Proposed Amendments to NI 21-101 and 23-101 • Minimum size threshold for dark orders • Clarify when IOI is an order • Lower threshold notification triggers for ATSs • New “fair and orderly markets” obligation

  42. II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2 Upcoming Changes • Proposed NI 23-103 – Direct Market Access • Comprehensive regime to govern DMA • Broader than current TSX “eligible client” approach to trading access • Puts onus on “market participants” (NI 21-101) to govern trading access • Excludes EMDs • UMIR Integrated Fee Model • Proposal to charge fees based on number of “messages” vs. trades

  43. Questions and Answers Simon A. Romanosromano@stikeman.com Ramandeep K. Grewal rgrewal@stikeman.com

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