Backgrounder: Proposed Amendments 23-101 Trading Rules - Order Protection Rule
The proposed amendments to National Instrument 23-101 Trading Rules (NI 23-101) are part of an ongoing and broader effort by the OSC and other securities regulatory authorities in Canada to ensure fair and efficient capital markets. The technology, speed and complexity of trading have changed significantly over the last decade and continue to evolve at an increasing rate. Regulators recognize that the regulatory framework must keep pace with these rapid developments. By anticipating and addressing issues, the Ontario Securities Commission (OSC) is able to foster confidence in our markets through responsive policy development.
The Canadian Securities Administrators (CSA) established a framework in 2001 to permit competition among traditional exchanges and other marketplaces with the creation and implementation of National Instrument 21-101 Marketplace Operation and NI 23-101. Underlying the creation of these rules was the objective of upholding specific characteristics viewed as essential to an efficient market; liquidity, immediacy, transparency, price discovery, fairness and market integrity. Consideration of these characteristics has carried through all of the subsequent work by the OSC on market structure.
Order Protection Rule (OPR) Review:
Implemented in 2011, OPR was established to instill confidence on the part of investors by ensuring that “all immediately accessible, visible, better-priced limit orders are executed before the inferior-priced limit orders are not traded through”. In other words, ensuring investors get the best price for their trades.
Following a review of the OPR framework, the CSA confirmed certain benefits of the rule, but also identified a number of inefficiencies and costs associated with its implementation. The proposed amendments, announced May 15, aim to strike a better balance between these costs and benefits.
Having completed its review, the CSA is of the view that the objectives of OPR continue to be important and that order protection should continue to be a fundamental part of the Canadian marketplace. The amendments proposed strike a balance for investors and market participants between the costs and benefits of OPR.
A market share threshold of 5 per cent will be established, at or above which a marketplace’s displayed orders are protected under OPR, while recognized exchanges that do not meet the threshold will be protected only for their listed securities. Additionally, new requirements will be introduced that would mandate specific dealer disclosure relating to best execution policies in order to promote transparency in an environment where not all displayed orders must be accessed under OPR.
Interim measures to cap trading fees will be proposed. For equities and exchange-traded funds (ETFs) trading at prices greater than or equal to $1.00, the cap will be set at the same level as in the United States ($0.0030 per share). A lower cap is proposed for equities and ETFs trading at prices less than $1.00.
A transparent methodology to assess real-time market data fees for professional market data subscribers is outlined. Marketplaces will be required to seek re-approval of these fees on an annual basis. Regulators will also consider additional action in relation to real-time market data fees for non-professional market data subscribers.
Other market structure initiatives:
Following the implementation of the electronic trading rule in March 2013, which requires market participants and marketplaces to take an active role in managing the risks associated with electronic trading including high frequency trading, the OSC commissioned a report to determine whether the regulatory requirements for electronic trading continue to be robust in the context of a complex trading environment. The report, published in December 2013, found no gaps in the regulatory framework, but made some suggestions for additional improvements.
High Frequency Trading
As set out above, we have implemented a framework for electronic trading, including high frequency trading, to manage the risks associated with electronic trading. This includes the requirement for market participants to understand and test algorithms. We continue to monitor issues associated with high frequency trading and the impact on the market.
Dark Pools & Dark Liquidity
In October 2012, a framework for dark liquidity was introduced to regulate the use of orders entered without pre-trade transparency (dark orders). The framework requires visible order priority and in certain circumstances, meaningful price improvement for trades involving dark orders.