CANADIAN SECURITY TRADERS ASSOCIATION, INC.
P.O. Box 3, 31 Adelaide Street East
Toronto, Ontario M5C 2H8
James Twiss, Chief Policy Counsel
Investment Industry Regulatory Organization of Canada (IIROC)
145 King Street West, Suite 900
Toronto, Ontario M5H 1J8
Dear Mr. Twiss,
RE: Market Integrity Notice No. 2008-09 Provisions Respecting the “Best Price“ Obligation
The Canadian Security Traders Association, Inc. (CSTA) welcomes the opportunity to respond to the interim amendments respecting “best price” obligations that have been approved by the Investment Industry Regulatory Organization of Canada (IIROC)
The CSTA commends IIROC for addressing the need for amendments to the current rules and regulations governing this issue.
We refer back to the CSTA letter of December 14, 2007 on our response to “trade-through obligations”. In that submission we made several recommendations which we believe could also pertain to “best price” obligation. Some of those recommendations were:
- A National Best Bid / Best Offer system should be instituted in order for Participants to comply with “Best price” and “Trade-Through” obligations.
- Institute a de-minimus rule that would require a marketplace to obtain 5% of monthly trading volume in any one security. This will assist Participants to avoid the costs associated with installing securities in a smart router.
- In this submission we also recommended a minimum of 60 days of stress testing for every new marketplace. After due diligence, it appears that 60 days is an insufficient integration period in order to develop, implant and test functionality. We note IIROC has implemented a 90 day integration period. We would recommend 60 days and if testing is unsuccessful 30 additional days to test from the date of the fix release.
- Appropriate trade functionality to insure Participants compliance with UMIR.
- A time of 1 second trade-through exemption for trading through any new quote, similar to U.S. regulations.
The CSTA would like to respond on other issues that have been approved as “Interim Amendments” but in some cases we feel that more clarity is required, as stated below:
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i) |
Definition of a “foreign organized regulated market” and when is a Participant required to access these markets to assure “best price obligation” ? |
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ii) |
Definition of “recently launched operations” and “inferior fills”. |
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iii) |
Guidance on a Participants attempts for “reasonable efforts” to satisfy “best price” obligations. What evidence will be required to establish whether or not a participant did attempt to execute on a "reasonable efforts" basis? |
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iv) |
Definition of “vary the price”, what procedure is involved? |
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v) |
How can a Participant monitor and document the performance of an order router? It must rely on reports of the marketplace, if there is no National BBBO. |
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vi) |
In the event of a material malfunction or interruption of services, should it not be the responsibility of regulators to determine the order flow to protected marketplaces not the Participant? This type of situation will have an impact on the entire industry. |
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vii) |
Guidance on what Participants can do if their primary vendor is unable to provide the required order information from a protected marketplace. |
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viii) |
As in the case of interruption of marketplace service, please supply the rationale of why a Participant must monitor the unavailability of quotes when this is an industry-wide problem. |
The CSTA believes that the "best price" obligation arises at the time of entry not at the time of execution. Under the "time of execution" scenario a Participant would be required to constantly monitor all existing order flow and if necessary, route an order to another marketplace. We believe a Participant should be able to enter an order on a transparent Marketplace and establish a best bid/offer and not be required to check on other marketplaces, post time of order entry.
The CSTA is very concerned about recent events that have occurred in a protected marketplace. The first example is the trading in BCE on May 22 on the TSX. There were obvious trading difficulties in the stock yet the TSX did not issue an industry-wide alert for nearly 30 minutes and Participants were unable to redirect orders that were stuck in the TSX system. The second example is Russell Metals on June 11th, when a trading halt was issued on the TSX “pending news”. While the stock was halted on the TSX it continued to be quoted on Pure Trade. There was an obvious breakdown in communication and hopefully this major oversight has been corrected.
The CSTA is also looking for the definition of “Potential Violation Alert Notifications” replacing Notifications of Trade-Through Alerts. Will a “PVAN” be issued to a trader’s employer or be kept on RS records? Our association believes that until the industry has a national BBBO system or a smart router that can sweep all protected marketplaces, traders should be exempted from any type of trade-through violations.
Ultimately "best price" obligation is the responsibility of the trader. It should be the goal of Regulators, Marketplaces and Vendors to establish rules and procedures that will eliminate ambiguity in trader’s responsibilities.
Perhaps the most efficient and cost effective option for IIROC and the CSA would be to wait for the promised effective functionality of market place routers to be provided by several Canadian 'Protected Marketplaces' in the near future. The uneconomical and needless expense and apparent rush to make irrational and arbitrary rules can be totally avoided by requiring Canadian Marketplaces to provide Smart Router functionality that will rout an order to the best price. Canadian Regulators can learn a valuable lesson from our American friends and avoid making rules that will require countless Exception amendments to Trade Through Rules.
The CSTA also hopes that the CSA takes into consideration some of the views our association has aired when finalizing the rules and regulations of “trade through” and “best price” obligations.
Again, the CSTA commends IIROC for being pro-active and recognizing that some issues needed to be addressed. We would welcome the opportunity to discuss further any matters that relate to these provisions.
c.c. Susan Greenglass, Manager, Market Regulation Department,
Ontario Securities Commission
20 Queen Street West, Suite 1903, Toronto ON M5H 3S8
sgreenglass@osc.gov.on.ca