With the emerging threat of orders for Canadian securities being routed to the U.S., IIROC today republished for comment a proposed anti-avoidance provision to foster debate about the best approach to maintaining healthy and competitive Canadian markets.
Currently, an exception to the Order Exposure Rule allows small client orders to be withheld from a lit marketplace if such orders receive meaningful price improvement. Meaningful price improvement refers to the amount of price improvement that is provided to an order that receives a better price than the National Best Bid or Offer.
Under the UMIR, “better price” is defined as price improvement of at least one trading increment (for example, one penny for securities priced $0.50 or more) or at least a half-increment when the difference between the best ask price and the best bid price is a single trading increment.
Another exception allows orders to be executed on foreign organized regulated markets (FORMs). This exception means that orders routed to foreign jurisdictions may bypass opportunities to trade with orders displayed on Canadian markets. Further, when orders are routed to a FORM, they may not receive meaningful price improvement. For example, orders routed to the U.S. commonly receive 1/10 of a cent per share or less in price improvement. On a $20,000 trade of 1000 shares of a security priced at $20 the price improvement would be $1.
IIROC’s proposed amendments would permit market participants to execute small client orders on a non-Canadian market only when the order is entered on a FORM that displays order information, or the order receives meaningful price improvement.
“IIROC’s proposal would achieve consistent application of the rules we have designed to incent price discovery on Canadian public markets in order to keep our markets healthy,” said IIROC president and CEO Andrew Kriegler. “We believe that Canadians should get the best possible price, but the price improvement must be sufficiently meaningful to forgo the benefits that transparency brings to Canada and to the quality of Canadian markets.”
Today’s announcement builds on IIROC’s guidance published in December 2014 to reaffirm the existing IIROC requirement that orders sent to a market outside of Canada be executed on FORMs which, as defined in the Universal Market Integrity Rules (UMIR), have substantially the same regulatory monitoring and dissemination of data to the public as Canadian marketplaces.
The deadline for comments is March 30, 2015.