The relative illiquidity of the Canadian markets ensures that wide bid ask spreads can predominate, reminding everyone these spreads represent underlying posted orders within the central limit book. To completely eradicate the validity of this order flow is illogical whether it is from an institutional or retail perspective. This is not meant to imply that regulation should be onerous or costly when if it is required on trade-through; but it does require that we offer all participants a fair and equitable marketplace.

 

The transparency of the Canadian markets remains a global competitive advantage. We can and will attract order flow to our capital markets when participants, especially on a global basis, find that execution is accessible and relatively easy. This is many times the case for non-North American investors that may only access the Canadian capital markets on an occasional basis. The transparency factor must remain prevalent in all of our minds and might I remind everyone that all traders are “in the business of doing business”.    From a practical purpose it would appear “unseemly” for an international money manager to have not received a fill on an order that was displayed within the central limit order book, while stock has traded through the client’s limit.

 

Within this discussion on the market structure issues and the determinants that should be considered as part of the trade-through obligation, the Canadian STA would like to articulate two fundamental views 1) best execution is not the same as best price 2) best execution has not been clearly defined by any industry parties and is currently viewed by our constituents as a process. From a trading perspective best execution relates to our ability to buy or sell stock subject to the volume, pricing and risk parameters characteristic of that specific name at the exact time of execution. All current participants in the Canadian marketplace are conversant with the time priority rules and that if your volume constraints require you to test price discovery limits outside the current quote then you will find some displacement of volume that must be satisfied. This is a standard and well-understood trading protocol. In many cases the dealing community utilize their trading capital to facilitate the client’s ultimate volume requests. However our existing trading community is totally conversant with the need to satisfy demand or supply within the central limit order book. Therefore the process of satisfying your ultimate volume, pricing and risk parameters on a stock must ensure that market structure in Canada remains a global competitive advantage. Given that view the Canadian STA maintains that access fees for ATS’s must be fair & transparent, with accessibility and speed not becoming impediments to execution (which would be contrary to any definition of best execution) and that liquidity and depth of market are not negatively impacted by the eradication of the strength of the central limit order book. The Canadian STA does however recognize the realities of the cost structure inherent in satisfying trade-through obligations and would state that the onus should be upon the marketplaces to maintain the integrity of trade through. In most cases the buy side are not equipped nor trading any type of proprietary capital, thereby complicating the realities of any trade costs. The cost of maintaining systems to respect the trade through would also not be reasonable or practical at this stage for the buy side constituents. 

 

The second discussion point by the CSA recognizing and supporting the role of the retail participation in the market clearly speaks to the need to maintain the integrity of the central limit order book. Institutional investors clearly conduct the majority of their business on the upstairs markets, while satisfying the supply and demand constraints of the central limit order book when volume and risk parameters deem it appropriate. The Canadian STA views its comments as complimentary and consistent with the protection and improvement of the role of the retail investor.

 

 

The CSA objective to “promote greater order interaction and displayed depth” speaks clearly to the need to an evolutionary process in the Canadian capital markets as we address whatever operating realities present themselves due to trade through obligations. When researching the Reg NMS case for trade through we must not miss a simple yet key difference between our Canadian capital markets and the U.S.A. They actually have volume going through on their ATS’s, it is yet to be seen if Canadian market participants will actually demand ongoing services from an ATS sufficient for many to survive profitably. The Canadian capital markets may likely require far fewer alternative market places. Having said that our view remains that increased competition is required in the Canadian capital markets and whether there are 2 or 20 market places eventually operating in Canada we must foster a fair, transparent and accessible market structure. The CSA must also ensure that greater order interaction and displayed depth will occur; this must predominate any of its regulatory actions, but this will never happen with onerous regulatory constraints. Our Canadian capital markets represent our listed corporations well on a global basis because we can offer investors be they domestic, American or International a transparency, ease of access and execution that does garner global interest. Trade-through protection should be imposed where there are multiple marketplaces trading the same security otherwise order depth will disappear, a trader from either the buy side or sell side will not post orders in the central limit order book merely to help their competitors achieve an effective price discovery process, why post a bid or offer if the probability of actually getting execute is lowered while others benefit from your information? That being said given that the Canadian STA adheres to the notion that all marketplace participants should have an obligation and a duty to the markets, if a trade-through obligation is imposed it should be on the market places. The buy side is not equipped at this stage to be address the costs nor systems issues relevant to all market place participants. 

 

As a means of consolidating the thoughts of the CanadianSTA, we would like to advocate the following market structure characteristics if a trade-through obligation is determined:

 

 

Best execution may not necessarily mean best price. As “best execution” is termed a process, “best price” should also be viewed as an objective and not a finite description. However, best execution and trade-through protection are not necessarily mutually exclusive propositions. If technological links exist between the market places, there is no reason to assume that orders could not be executed efficiently and quickly while maintaining trade-through protection.

 

Before implementing a Trade-Through Obligation, the CSA should completely understand the industry ramifications and costs relevant to the systems and automation necessary and clearly address issues relevant to access fees. Once market participants have open and efficient access to trade on all market centers on an automated and market neutral basis, competition should ensure that client order flow is executed within the process relevant to best execution. The CSA should utilize an evolutionary process on any adoption of the trade-through obligation basing it upon empirical analysis and evidence from the Canadian capital markets whilst ensuring that fairness, transparency and access encourage greater order flow on a global basis into Canada.

 

Thank you for the opportunity to comment on these important matters.