STIKEMAN ELLIOTT LLP The New World of Multiple Securities Marketplaces in Canada Simon Romano Raman Grewal Stikeman Elliott October 5,

STIKEMAN ELLIOTT LLP www.stikeman.com

The New World of Multiple Securities Marketplaces in CanadaSimon RomanoRaman Grewal

Stikeman ElliottOctober 5, 2011

SLIDE 2 STIKEMAN ELLIOTT LLP

Agenda

1. ATSs in CanadaI. What is an ATS?

II. Who are the players?

III. Issues and Opportunities

2. ATS RegulationsI. ATS Rules

II. IIROC and TSX

III. Upcoming Changes

3. Q&A

The New World of Multiple Marketplaces


PART 1

ATSs in Canada


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

ATSs in Canada1


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

ATSs in Canada1


Advantages

■“alternative trading systems” alternative to traditional exchanges

– broader trading options and strategies

– different pricing

– customized services

– access to markets

I. ATSs in Canada ATSs in Canada1


Types of ATSs

■Auction markets

■Call markets

■Crossing systems/networks

■Dark pools

■Market makers

I. ATSs in Canada

- 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

ATSs in Canada1


Equity ATSs in Canada

■Alpha ATS

■Bloomberg Tradebook Canada

■Chi-X Canada

■Instinet Canada Cross (ICX)

■Liquidnet Canada

I. ATSs in Canada

■MATCH Now

■Omega

■Pure

■TMX Select

■Sigma X

ATSs in Canada1


The Canadian Market – Equity ATSs

LIQUIDNETCANADA

RETAILCLIENTS

BLOOMBERG TRADE BOOK

CANADA

BROKERS INSTITUTIONS

MATCH Now OMEGA

PURETRADING

DATAVENDOR

S

TSX

Chi-X Instinet ALPHA Sigma X

Smart Order

RoutingBest Ex

OPR,Trading Costs

& Speed

IIROC

CDS

DataConsolidatio

n

Cross-Market

Surveillance

Clearing &Settlement

TMX Select

ATSs in Canada1

With thanks to Tracey Stern of the OSC


Market Share



New Players

■Sigma X Canada

– Launch announced by Goldman Sachs Canada in August, 2011

■TMX Select

– Commenced trading in July, 2011



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




■Dark Pools and Dark Orders, Issues cont.

■Can be fully or partially “dark”

■ Icebergs (reserve orders)




■Pegged Orders (reference-priced)

■Algorithmic Trading

■High Frequency Trading (HFT)

■Flash Trading

■Co-location







■Some Issues raised:

– Fragmentation

– Price Discovery

– Liquidity

– Internalization

– Costs

– Market Integrity




■Some Issues raised

– Specific Dealer/marketplace obligations:■Best price

■Price-time priority

■Best execution

■Order protection



PART 2

ATS Regulation


– - DIAGRAM

II. ATS Regulation

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

IlROC

ATSQTRSExchanges

I. ATSs in Canada ATS Regulation2

(None at present)


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

II. ATS RegulationII. ATS RegulationI. ATSs in Canada ATS Regulation2


ATS Rules – NI 21-101

■Rules Applicable only to ATSs

■Rules Applicable only to Exchanges and QTRSs

■Rules Applicable to all marketplaces



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



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)




■Reporting

■Threshold “trigger” notifications

■Confidentiality protections

■Risk Disclosure




■Clearing and Settlement

– trades reported and settled through clearing agency

– dealer (subscriber) or ATS decide who reports to clearing agency



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



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




■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




■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




■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



NI 23-101 – Trading Rules

II. ATS Regulation

■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

II. ATS RegulationI. ATSs in Canada ATS Regulation2



II. ATS Regulation

■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




II. ATS Regulation

■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.




II. ATS Regulation

■Best Execution

■price, speed, certainty and overall cost

order size, reliability of quotes, liquidity,

market impact and opportunity costs




II. ATS Regulation

■Order Protection Rule

■Includes

– trade-throughs

– locked or crossed markets

– anti-avoidance




II. ATS Regulation

■ 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




II. ATS Regulation

■ 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




II. ATS Regulation

■Best Execution and Order Protection

Intersection with Price-Time Priority



IIROC and TSX

II. ATS Regulation

■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



IIROC and TSX

II. ATS Regulation

■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



Upcoming Changes

II. ATS Regulation

■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



Upcoming Changes

II. ATS Regulation

■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



Questions and AnswersSimon A. [email protected]

Ramandeep K. Grewal [email protected]

STIKEMAN ELLIOTT LLP

Documents

STIKEMAN ELLIOTT LLP The New World of Multiple Securities Marketplaces in Canada Simon Romano Raman Grewal Stikeman Elliott October 5,