The New World of
Multiple Securities
Marketplaces in Canada
Simon Romano
Raman Grewal
Stikeman Elliott
October 5, 2011
STIKEMAN ELLIOTT LLP
www.stikeman.com
The New World of Multiple Marketplaces
Agenda
ATSs in Canada
1.
I.
What is an ATS?
II.
Who are the players?
III.
Issues and Opportunities
ATS Regulations
2.
3.
SLIDE 1
I.
ATS Rules
II.
IIROC and TSX
III.
Upcoming Changes
Q&A
STIKEMAN ELLIOTT LLP
PART 1
ATSs in Canada
STIKEMAN ELLIOTT LLP
www.stikeman.com
1 ATSs in Canada
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
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STIKEMAN ELLIOTT LLP
1 ATSs in Canada
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
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Advantages
■ “alternative trading systems”
alternative to traditional exchanges
– broader trading options and strategies
– different pricing
– customized services
– access to markets
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Types of ATSs
■ Auction markets
- continuous matching and execution
■ Call markets
- orders aggregated and executed in
intervals
■ Crossing
- do not discover prices but allow crosses
by buyers and sellers who quote on other
markets
■ Dark pools
- no pre-trade transparency
■ Market makers
- liquidity providers continuously quote bid
and ask prices for immediate execution
systems/networks
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Equity ATSs in Canada
■ Alpha ATS
■ MATCH Now
■ Bloomberg Tradebook
■ Omega
Canada
■ Chi-X Canada
■ Instinet Canada Cross
(ICX)
■ Pure
■ TMX Select
■ Sigma X
■ Liquidnet Canada
SLIDE 7
STIKEMAN ELLIOTT LLP
1 ATSs in Canada
The Canadian Market – Equity ATSs
RETAIL
CLIENTS
Smart Order
Routing
Best Ex
BLOOMBERG
TRADE BOOK
CANADA
LIQUIDNET
CANADA
BROKERS
INSTITUTIONS
MATCH Now
OMEGA
DATA
VENDORS
IIROC
OPR,
Trading
Costs
& Speed
PURE
TRADING
TSX
Instinet
Cross-Market
Surveillance
TMX Select
CDS
Chi-X
Data
Consolidation
ALPHA
Clearing &
Settlement
Sigma X
With thanks to Tracey Stern of the OSC
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Market Share
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New Players
■ Sigma X Canada
– Launch announced by Goldman Sachs Canada
in August, 2011
■ TMX Select
– Commenced trading in July, 2011
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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
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Issues (Opportunities)
■ Dark Pools and Dark Orders, Issues cont.
■ Can be fully or partially “dark”
■ Icebergs (reserve orders)
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Issues (Opportunities)
■ Pegged Orders (reference-priced)
■ Algorithmic Trading
■ High Frequency Trading (HFT)
■ Flash Trading
■ Co-location
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Issues (Opportunities)
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Issues (Opportunities)
■ Some Issues raised:
– Fragmentation
– Price Discovery
– Liquidity
– Internalization
– Costs
– Market Integrity
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Issues (Opportunities)
■ Some Issues raised
– Specific Dealer/marketplace obligations:
■ Best price
■ Price-time priority
■ Best execution
■ Order protection
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PART 2
ATS Regulation
STIKEMAN ELLIOTT LLP
www.stikeman.com
2 I.
II.
ATS
ATSs
ATS
Regulation
Regulation
in Canada

Securities Acts
N1 21-101/N1 23-101 = ATS Rules
N1 31-103 – Dealer and Advisor
Registration and Requirements
– - DIAGRAM
CSA
IlROC
Exchanges
QTRS
SRO – UMIR/Dealer Member Rules
RSP (Regulation Services Provider)
ATS
(None at present)
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2 I.
II.
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ATSs
ATS
Regulation
Regulation
in Canada
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
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Regulation
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ATS Rules – NI 21-101
■ Rules Applicable only to ATSs
■ Rules Applicable only to Exchanges and QTRSs
■ Rules Applicable to all marketplaces
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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
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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)
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NI 21-101 - Rules Applicable only to ATSs
■ Reporting
■ Threshold “trigger” notifications
■ Confidentiality protections
■ Risk Disclosure
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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
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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
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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
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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
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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
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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
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NI 23-101 – Trading Rules
■ 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
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NI 23-101 – Trading Rules
■ 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
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NI 23-101 – Trading Rules
■ 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.
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NI 23-101 – Trading Rules
■ Best Execution
■ price, speed, certainty and overall cost
order size, reliability of quotes, liquidity,
market impact and opportunity costs
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NI 23-101 – Trading Rules
■ Order Protection Rule
■ Includes
– trade-throughs
– locked or crossed markets
– anti-avoidance
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NI 23-101 – Trading Rules
■ 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 nonstandard, 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
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NI 23-101 – Trading Rules
■ 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
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NI 23-101 – Trading Rules
■ Best Execution and Order Protection
Intersection with Price-Time Priority
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IIROC and TSX
■ 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
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IIROC and TSX
■ 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
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2 I.
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Upcoming Changes
■ 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
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2 I.
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Upcoming Changes
■ 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
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STIKEMAN ELLIOTT LLP
Questions and Answers
Simon A. Romano
sromano@stikeman.com
Ramandeep K. Grewal
rgrewal@stikeman.com
STIKEMAN ELLIOTT LLP
www.stikeman.com
STIKEMAN ELLIOTT LLP