The New World of Multiple Marketplaces in Canada

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The New World of Multiple Marketplaces in Canada

  1. 1. The New World of Multiple Securities Marketplaces in Canada Simon Romano Raman Grewal Stikeman Elliott October 5, 2011
  2. 2. Agenda <ul><li>ATSs in Canada </li></ul><ul><ul><li>What is an ATS? </li></ul></ul><ul><ul><li>Who are the players? </li></ul></ul><ul><ul><li>Issues and Opportunities </li></ul></ul><ul><li>ATS Regulations </li></ul><ul><ul><li>ATS Rules </li></ul></ul><ul><ul><li>IIROC and TSX </li></ul></ul><ul><ul><li>Upcoming Changes </li></ul></ul><ul><li>Q&A </li></ul>SLIDE STIKEMAN ELLIOTT LLP The New World of Multiple Marketplaces
  3. 3. PART 1 ATSs in Canada
  4. 4. What is an ATS? <ul><li>electronic trading system </li></ul><ul><li>automated trade matching </li></ul><ul><li>electronic process to buy and sell orders </li></ul><ul><li>multiple buyers and sellers </li></ul><ul><li>predetermined, non-discretionary trading methods </li></ul>SLIDE STIKEMAN ELLIOTT LLP ATSs in Canada 1
  5. 5. What is NOT an ATS? <ul><li>one-on-one systems (eg. equity offerings) </li></ul><ul><li>non-binding indications of interest (IOIs) that require further negotiation to produce a trade </li></ul>SLIDE STIKEMAN ELLIOTT LLP ATSs in Canada 1
  6. 6. Advantages <ul><li>“ alternative trading systems” alternative to traditional exchanges </li></ul><ul><ul><li>broader trading options and strategies </li></ul></ul><ul><ul><li>different pricing </li></ul></ul><ul><ul><li>customized services </li></ul></ul><ul><ul><li>access to markets </li></ul></ul>SLIDE STIKEMAN ELLIOTT LLP I. ATSs in Canada ATSs in Canada 1
  7. 7. Types of ATSs <ul><li>Auction markets </li></ul><ul><li>Call markets </li></ul><ul><li>Crossing systems/networks </li></ul><ul><li>Dark pools </li></ul><ul><li>Market makers </li></ul>SLIDE STIKEMAN ELLIOTT LLP I. ATSs in Canada <ul><li>- continuous matching and execution </li></ul><ul><li>- orders aggregated and executed in intervals </li></ul><ul><li>- do not discover prices but allow crosses by buyers and sellers who quote on other markets </li></ul><ul><li>- no pre-trade transparency </li></ul><ul><li>- liquidity providers continuously quote bid and ask prices for immediate execution </li></ul>ATSs in Canada 1
  8. 8. Equity ATSs in Canada <ul><li>Alpha ATS </li></ul><ul><li>Bloomberg Tradebook Canada </li></ul><ul><li>Chi-X Canada </li></ul><ul><li>Instinet Canada Cross (ICX) </li></ul><ul><li>Liquidnet Canada </li></ul>SLIDE STIKEMAN ELLIOTT LLP I. ATSs in Canada <ul><li>MATCH Now </li></ul><ul><li>Omega </li></ul><ul><li>Pure </li></ul><ul><li>TMX Select </li></ul><ul><li>Sigma X </li></ul>ATSs in Canada 1
  9. 9. The Canadian Market – Equity ATSs SLIDE STIKEMAN ELLIOTT LLP LIQUIDNET CANADA RETAIL CLIENTS BLOOMBERG TRADE BOOK CANADA BROKERS INSTITUTIONS MATCH Now OMEGA PURE TRADING DATA VENDORS TSX Chi-X Instinet ALPHA Sigma X Smart Order Routing Best Ex OPR, Trading Costs & Speed IIROC CDS Data Consolidation Cross-Market Surveillance Clearing & Settlement TMX Select ATSs in Canada 1 With thanks to Tracey Stern of the OSC
  10. 10. Market Share SLIDE STIKEMAN ELLIOTT LLP I. ATSs in Canada ATSs in Canada 1
  11. 11. New Players <ul><li>Sigma X Canada </li></ul><ul><ul><li>Launch announced by Goldman Sachs Canada in August, 2011 </li></ul></ul><ul><li>TMX Select </li></ul><ul><ul><li>Commenced trading in July, 2011 </li></ul></ul>SLIDE STIKEMAN ELLIOTT LLP I. ATSs in Canada ATSs in Canada 1
  12. 12. Issues (Opportunities) <ul><li>Dark Pools </li></ul><ul><ul><li>Purpose: </li></ul></ul><ul><ul><ul><li>Liquidity </li></ul></ul></ul><ul><ul><ul><li>Execution </li></ul></ul></ul><ul><ul><ul><li>Reduced trading costs due to </li></ul></ul></ul><ul><ul><ul><li>less information leakage </li></ul></ul></ul><ul><ul><li>Issues: </li></ul></ul><ul><ul><ul><li>Pre-trade transparency generally required </li></ul></ul></ul><ul><ul><ul><li>Cloak of darkness designed to, among other things, control market impact costs </li></ul></ul></ul>SLIDE STIKEMAN ELLIOTT LLP I. ATSs in Canada ATSs in Canada 1
  13. 13. Issues (Opportunities) <ul><li>Dark Pools and Dark Orders, Issues cont. </li></ul><ul><ul><ul><li>Can be fully or partially “dark” </li></ul></ul></ul><ul><ul><ul><li>Icebergs (reserve orders) </li></ul></ul></ul>SLIDE STIKEMAN ELLIOTT LLP I. ATSs in Canada ATSs in Canada 1
  14. 14. Issues (Opportunities) <ul><li>Pegged Orders (reference-priced) </li></ul><ul><li>Algorithmic Trading </li></ul><ul><li>High Frequency Trading (HFT) </li></ul><ul><li>Flash Trading </li></ul><ul><li>Co-location </li></ul>SLIDE STIKEMAN ELLIOTT LLP I. ATSs in Canada ATSs in Canada 1
  15. 15. Issues (Opportunities) SLIDE STIKEMAN ELLIOTT LLP I. ATSs in Canada ATSs in Canada 1
  16. 16. Issues (Opportunities) <ul><li>Some Issues raised: </li></ul><ul><ul><li>Fragmentation </li></ul></ul><ul><ul><li>Price Discovery </li></ul></ul><ul><ul><li>Liquidity </li></ul></ul><ul><ul><li>Internalization </li></ul></ul><ul><ul><li>Costs </li></ul></ul><ul><ul><li>Market Integrity </li></ul></ul>SLIDE STIKEMAN ELLIOTT LLP I. ATSs in Canada ATSs in Canada 1
  17. 17. Issues (Opportunities) <ul><li>Some Issues raised </li></ul><ul><ul><li>Specific Dealer/marketplace obligations: </li></ul></ul><ul><ul><ul><li>Best price </li></ul></ul></ul><ul><ul><ul><li>Price-time priority </li></ul></ul></ul><ul><ul><ul><li>Best execution </li></ul></ul></ul><ul><ul><ul><li>Order protection </li></ul></ul></ul>SLIDE STIKEMAN ELLIOTT LLP I. ATSs in Canada ATSs in Canada 1
  18. 18. PART 2 ATS Regulation
  19. 19. <ul><ul><li>- DIAGRAM </li></ul></ul>SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation <ul><li>Securities Acts N1 21-101/N1 23-101 = ATS Rules N1 31-103 – Dealer and Advisor Registration and Requirements </li></ul><ul><li>SRO – UMIR/Dealer Member Rules RSP (Regulation Services Provider) </li></ul><ul><li> </li></ul>CSA IlROC ATS QTRS Exchanges I. ATSs in Canada ATS Regulation 2 (None at present)
  20. 20. ATS Rules – NI 21-101 and NI 23-101 <ul><li>NI 21-101 – Largely operational and administrative </li></ul><ul><li>NI 23-101 – Substantive trading rules </li></ul><ul><li>Introduced in 2001 - exchange dominated environment </li></ul><ul><li>Continue to evolve to reality of multiple marketplaces </li></ul><ul><li>Currently subject to further amendments </li></ul><ul><li>Also subject to NI 24-101 governing trade matching and settlement </li></ul>SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2
  21. 21. ATS Rules – NI 21-101 <ul><li>Rules Applicable only to ATSs </li></ul><ul><li>Rules Applicable only to Exchanges and QTRSs </li></ul><ul><li>Rules Applicable to all marketplaces </li></ul>SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2
  22. 22. ATS Rules – NI 21-101 <ul><li>defines “marketplace” and “ATS” </li></ul><ul><ul><li>ATS, like exchange: </li></ul></ul><ul><ul><ul><li>brings together multiple buyers and sellers of securities using established, non-discretionary methods </li></ul></ul></ul><ul><ul><li>ATS, unlike exchange – does not: </li></ul></ul><ul><ul><ul><li>Require issuer to agree to have securities listed </li></ul></ul></ul><ul><ul><ul><li>Guarantee two-sided market </li></ul></ul></ul><ul><ul><ul><li>Govern conduct of subscribers (maybe) </li></ul></ul></ul><ul><ul><ul><li>Discipline subscribers </li></ul></ul></ul>SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2
  23. 23. NI 21-101 - Rules Applicable only to ATSs <ul><li>Registration – shall not carry on business unless </li></ul><ul><ul><li>Registered as dealer </li></ul></ul><ul><ul><li>SRO member (IIROC) </li></ul></ul><ul><ul><li>Compliant with ATS Rules (NI 21-101 and NI 23-101) </li></ul></ul><ul><li>Can trade only in: </li></ul><ul><ul><li>Exchange-traded securities </li></ul></ul><ul><ul><li>Corporate or government debt </li></ul></ul><ul><ul><li>Foreign exchange-traded securities (opportunity) </li></ul></ul>SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2
  24. 24. NI 21-101 - Rules Applicable only to ATSs <ul><li>Reporting </li></ul><ul><li>Threshold “trigger” notifications </li></ul><ul><li>Confidentiality protections </li></ul><ul><li>Risk Disclosure </li></ul>SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2
  25. 25. NI 21-101 - Rules Applicable only to ATSs <ul><li>Clearing and Settlement </li></ul><ul><ul><li>trades reported and settled through clearing agency </li></ul></ul><ul><ul><li>dealer (subscriber) or ATS decide who reports to clearing agency </li></ul></ul>SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2
  26. 26. NI 21-101 - Rules Applicable only to Exchanges and QTRSs <ul><ul><li>Must apply for “recognition” (if granted, recognition order sets out additional requirements, including governance, financial statements, financial covenants, technology, etc.) </li></ul></ul><ul><ul><li>Reporting to CSA </li></ul></ul><ul><ul><li>Establish “compliance” rules </li></ul></ul><ul><ul><li>Rules </li></ul></ul><ul><ul><ul><li>Not contrary to “public interest” </li></ul></ul></ul><ul><ul><ul><li>Cannot “unreasonably” discriminate among clients, issuers and members </li></ul></ul></ul><ul><ul><li>Filing procedure </li></ul></ul><ul><ul><li>Can self-regulate, but to date all use IIROC as their RSP </li></ul></ul>SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2
  27. 27. NI 21-101 - Rules Applicable to all marketplaces <ul><li>S. 5.1/5.2 and 6.12/6.13 - Fair Access ** </li></ul><ul><li>Part 7 and 8 - Transparency ** </li></ul><ul><li>Part 10 - Fees </li></ul><ul><li>Part 11 - Record Keeping </li></ul><ul><li>Part 12 - Systems </li></ul><ul><li>Part 14 - Information Processor </li></ul>SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2
  28. 28. NI 21-101 - Rules Applicable to all marketplaces <ul><li>Fair Access </li></ul><ul><ul><li>Must establish written standards for granting access </li></ul></ul><ul><ul><li>Not unreasonably prohibit, condition or limit access </li></ul></ul><ul><ul><li>Keep records of access granted </li></ul></ul><ul><li>Cannot restrict trading on other marketplaces </li></ul>SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2
  29. 29. NI 21-101 - Rules Applicable to all marketplaces <ul><li>Transparency </li></ul><ul><ul><li>Provide information to “information processor” (IP) </li></ul></ul><ul><ul><li>Pre-trade - required for all displayed “orders” </li></ul></ul><ul><ul><li>Post-trade – required for all trades </li></ul></ul><ul><li>IP to produce consolidated real-time feed </li></ul><ul><ul><li>Marketplace must comply with IP’s requirements </li></ul></ul>SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2
  30. 30. NI 21-101 - Rules Applicable to all marketplaces <ul><li>Pre-Trade Transparency – Issues </li></ul><ul><ul><li>What is an “order” </li></ul></ul><ul><ul><li>When is an indication of interest (IOI) an order </li></ul></ul><ul><ul><li>When is order “displayed” </li></ul></ul><ul><li>Specific issues for Dark Pools and Dark Orders, among others </li></ul>SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation II. ATS Regulation I. ATSs in Canada ATS Regulation 2
  31. 31. NI 23-101 – Trading Rules SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation <ul><li>Application </li></ul><ul><ul><li>23-101 vs. IIROC (UMIR) </li></ul></ul><ul><ul><li>SRO/RSP Jurisdiction – through monitoring and enforcement requirements </li></ul></ul><ul><ul><li>Jurisdiction over ATS and its Subscribers via “contractual agreements” required with RSP </li></ul></ul>II. ATS Regulation I. ATSs in Canada ATS Regulation 2
  32. 32. NI 23-101 – Trading Rules SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation <ul><li>Prohibits </li></ul><ul><ul><li>manipulation and fraud* </li></ul></ul><ul><li>Requires </li></ul><ul><ul><li>best execution* </li></ul></ul><ul><ul><li>order protection* </li></ul></ul><ul><ul><li>audit trail </li></ul></ul><ul><ul><li>* Do not apply under N1 23-101 if person complies with similar rules of an exchange, QTRS or RSP </li></ul></ul>II. ATS Regulation I. ATSs in Canada ATS Regulation 2
  33. 33. NI 23-101 – Trading Rules SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation <ul><li>Best Execution </li></ul><ul><ul><li>Must make “reasonable efforts” to achieve best execution when acting for client </li></ul></ul><ul><ul><li>Includes making “reasonable efforts” to use facilities providing information on orders and trades </li></ul></ul><ul><li>Enforcement actions against dealers for failing to connect to new ATSs </li></ul><ul><li>Does not apply under N1 23-101 to dealer that is an ATS complying with N1 21-101. </li></ul>II. ATS Regulation I. ATSs in Canada ATS Regulation 2
  34. 34. NI 23-101 – Trading Rules SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation <ul><li>Best Execution </li></ul><ul><li>price, speed, certainty and overall cost </li></ul><ul><ul><li>order size, reliability of quotes, liquidity, </li></ul></ul><ul><ul><li>market impact and opportunity costs </li></ul></ul>II. ATS Regulation I. ATSs in Canada ATS Regulation 2
  35. 35. NI 23-101 – Trading Rules SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation <ul><li>Order Protection Rule </li></ul><ul><li>Includes </li></ul><ul><ul><li>trade-throughs </li></ul></ul><ul><ul><li>locked or crossed markets </li></ul></ul><ul><ul><li>anti-avoidance </li></ul></ul>II. ATS Regulation I. ATSs in Canada ATS Regulation 2
  36. 36. NI 23-101 – Trading Rules SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation <ul><li>Order Protection Rule </li></ul><ul><ul><li>Requires each marketplace to establish and comply with policies and procedures designed to prevent trade-throughs on that marketplace, subject to certain exceptions </li></ul></ul><ul><ul><li>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 </li></ul></ul><ul><ul><li>Marketplace participants (dealers) – cannot enter directed action orders (DAOs) without having and complying with policies and procedures to prevent trade-throughs </li></ul></ul>II. ATS Regulation I. ATSs in Canada ATS Regulation 2
  37. 37. NI 23-101 – Trading Rules SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation <ul><li>Order Protection Rule , cont. </li></ul><ul><ul><li>Directed action orders (DAOs) - limit order for purchaser or sale of an exchange-traded security that: </li></ul></ul><ul><ul><ul><li>when entered or routed to a marketplace is to be: </li></ul></ul></ul><ul><ul><ul><ul><li>immediately executed against a protected order (remainder booked or cancelled), or </li></ul></ul></ul></ul><ul><ul><ul><ul><li>placed in order book, </li></ul></ul></ul></ul><ul><ul><ul><li>is marked as a DAO, and </li></ul></ul></ul><ul><ul><ul><li>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 </li></ul></ul></ul>II. ATS Regulation I. ATSs in Canada ATS Regulation 2
  38. 38. NI 23-101 – Trading Rules SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation <ul><li>Best Execution and Order Protection </li></ul><ul><ul><li>Intersection with Price-Time Priority </li></ul></ul>II. ATS Regulation I. ATSs in Canada ATS Regulation 2
  39. 39. IIROC and TSX SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation <ul><li>Dealers regulated by IIROC under Dealer Member Rules </li></ul><ul><li>Dealers and marketplaces regulated by UMIR </li></ul><ul><ul><li>ATSs directly regulated by IIROC as both dealers and marketplaces </li></ul></ul><ul><ul><li>ATSs and ATS subscribers required to submit to and comply with RSP requirements </li></ul></ul><ul><li>UMIR evolved over time – stretches to apply in multiple marketplace environment </li></ul>II. ATS Regulation I. ATSs in Canada ATS Regulation 2
  40. 40. IIROC and TSX SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation <ul><li>TSX rules apply to TSX participating organizations (POs) </li></ul><ul><ul><li>- extended via TSX Rule Book to apply to those related POs </li></ul></ul><ul><li>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) </li></ul><ul><li>Requires integration with TSX’s order book </li></ul><ul><li>Can impact dealers’ ability to establish in-house or affiliated ATSs </li></ul>II. ATS Regulation I. ATSs in Canada ATS Regulation 2
  41. 41. Upcoming Changes SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation <ul><li>Proposed Amendments to NI 21-101 and 23-101 </li></ul><ul><ul><li>Minimum size threshold for dark orders </li></ul></ul><ul><ul><li>Clarify when IOI is an order </li></ul></ul><ul><ul><li>Lower threshold notification triggers for ATSs </li></ul></ul><ul><ul><li>New “fair and orderly markets” obligation </li></ul></ul>II. ATS Regulation I. ATSs in Canada ATS Regulation 2
  42. 42. Upcoming Changes SLIDE STIKEMAN ELLIOTT LLP II. ATS Regulation <ul><li>Proposed NI 23-103 – Direct Market Access </li></ul><ul><ul><li>Comprehensive regime to govern DMA </li></ul></ul><ul><ul><li>Broader than current TSX “eligible client” approach to trading access </li></ul></ul><ul><ul><li>Puts onus on “market participants” (NI 21-101) to govern trading access </li></ul></ul><ul><ul><li>Excludes EMDs </li></ul></ul><ul><li>UMIR Integrated Fee Model </li></ul><ul><ul><li>Proposal to charge fees based on number of “messages” vs. trades </li></ul></ul>II. ATS Regulation I. ATSs in Canada ATS Regulation 2
  43. 43. Questions and Answers Simon A. Romano [email_address] Ramandeep K. Grewal [email_address]
  44. 44. STIKEMAN ELLIOTT LLP

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