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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 - PowerPoint PPT Presentation
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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
STIKEMAN ELLIOTT LLP www.stikeman.com
PART 1
ATSs in Canada
SLIDE 4 STIKEMAN ELLIOTT LLP
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
SLIDE 5 STIKEMAN ELLIOTT LLP
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
SLIDE 6 STIKEMAN ELLIOTT LLP
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
SLIDE 7 STIKEMAN ELLIOTT LLP
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
SLIDE 8 STIKEMAN ELLIOTT LLP
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
SLIDE 9 STIKEMAN ELLIOTT LLP
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
SLIDE 10 STIKEMAN ELLIOTT LLP
Market Share
I. ATSs in Canada ATSs in Canada1
SLIDE 11 STIKEMAN ELLIOTT LLP
New Players
■Sigma X Canada
– Launch announced by Goldman Sachs Canada in August, 2011
■TMX Select
– Commenced trading in July, 2011
I. ATSs in Canada ATSs in Canada1
SLIDE 12 STIKEMAN ELLIOTT LLP
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
I. ATSs in Canada ATSs in Canada1
SLIDE 13 STIKEMAN ELLIOTT LLP
Issues (Opportunities)
■Dark Pools and Dark Orders, Issues cont.
■Can be fully or partially “dark”
■ Icebergs (reserve orders)
I. ATSs in Canada ATSs in Canada1
SLIDE 14 STIKEMAN ELLIOTT LLP
Issues (Opportunities)
■Pegged Orders (reference-priced)
■Algorithmic Trading
■High Frequency Trading (HFT)
■Flash Trading
■Co-location
I. ATSs in Canada ATSs in Canada1
SLIDE 15 STIKEMAN ELLIOTT LLP
Issues (Opportunities)
I. ATSs in Canada ATSs in Canada1
SLIDE 16 STIKEMAN ELLIOTT LLP
Issues (Opportunities)
■Some Issues raised:
– Fragmentation
– Price Discovery
– Liquidity
– Internalization
– Costs
– Market Integrity
I. ATSs in Canada ATSs in Canada1
SLIDE 17 STIKEMAN ELLIOTT LLP
Issues (Opportunities)
■Some Issues raised
– Specific Dealer/marketplace obligations:■Best price
■Price-time priority
■Best execution
■Order protection
I. ATSs in Canada ATSs in Canada1
STIKEMAN ELLIOTT LLP www.stikeman.com
PART 2
ATS Regulation
SLIDE 19 STIKEMAN ELLIOTT LLP
– - 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)
SLIDE 20 STIKEMAN ELLIOTT LLP
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
SLIDE 21 STIKEMAN ELLIOTT LLP
ATS Rules – NI 21-101
■Rules Applicable only to ATSs
■Rules Applicable only to Exchanges and QTRSs
■Rules Applicable to all marketplaces
II. ATS RegulationII. ATS RegulationI. ATSs in Canada ATS Regulation2
SLIDE 22 STIKEMAN ELLIOTT LLP
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
II. ATS RegulationII. ATS RegulationI. ATSs in Canada ATS Regulation2
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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)
II. ATS RegulationII. ATS RegulationI. ATSs in Canada ATS Regulation2
SLIDE 24 STIKEMAN ELLIOTT LLP
NI 21-101 - Rules Applicable only to ATSs
■Reporting
■Threshold “trigger” notifications
■Confidentiality protections
■Risk Disclosure
II. ATS RegulationII. ATS RegulationI. ATSs in Canada ATS Regulation2
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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
II. ATS RegulationII. ATS RegulationI. ATSs in Canada ATS Regulation2
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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
II. ATS RegulationII. ATS RegulationI. ATSs in Canada ATS Regulation2
SLIDE 27 STIKEMAN ELLIOTT LLP
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
II. ATS RegulationII. ATS RegulationI. ATSs in Canada ATS Regulation2
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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
II. ATS RegulationII. ATS RegulationI. ATSs in Canada ATS Regulation2
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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
II. ATS RegulationII. ATS RegulationI. ATSs in Canada ATS Regulation2
SLIDE 30 STIKEMAN ELLIOTT LLP
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
II. ATS RegulationII. ATS RegulationI. ATSs in Canada ATS Regulation2
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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
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NI 23-101 – Trading Rules
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 RegulationI. ATSs in Canada ATS Regulation2
NI 23-101 – Trading Rules
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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 RegulationI. ATSs in Canada ATS Regulation2
SLIDE 34 STIKEMAN ELLIOTT LLP
NI 23-101 – Trading Rules
II. ATS Regulation
■Best Execution
■price, speed, certainty and overall cost
order size, reliability of quotes, liquidity,
market impact and opportunity costs
II. ATS RegulationI. ATSs in Canada ATS Regulation2
SLIDE 35 STIKEMAN ELLIOTT LLP
NI 23-101 – Trading Rules
II. ATS Regulation
■Order Protection Rule
■Includes
– trade-throughs
– locked or crossed markets
– anti-avoidance
II. ATS RegulationI. ATSs in Canada ATS Regulation2
SLIDE 36 STIKEMAN ELLIOTT LLP
NI 23-101 – Trading Rules
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 RegulationI. ATSs in Canada ATS Regulation2
SLIDE 37 STIKEMAN ELLIOTT LLP
NI 23-101 – Trading Rules
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 RegulationI. ATSs in Canada ATS Regulation2
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NI 23-101 – Trading Rules
II. ATS Regulation
■Best Execution and Order Protection
Intersection with Price-Time Priority
II. ATS RegulationI. ATSs in Canada ATS Regulation2
SLIDE 39 STIKEMAN ELLIOTT LLP
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
II. ATS RegulationI. ATSs in Canada ATS Regulation2
SLIDE 40 STIKEMAN ELLIOTT LLP
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
II. ATS RegulationI. ATSs in Canada ATS Regulation2
SLIDE 41 STIKEMAN ELLIOTT LLP
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
II. ATS RegulationI. ATSs in Canada ATS Regulation2
SLIDE 42 STIKEMAN ELLIOTT LLP
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
II. ATS RegulationI. ATSs in Canada ATS Regulation2
STIKEMAN ELLIOTT LLP www.stikeman.com
Questions and AnswersSimon A. [email protected]
Ramandeep K. Grewal [email protected]
STIKEMAN ELLIOTT LLP