Avis 2017-002 - Avis D’approbation Participation du Teneur de Marché et ordres Liés

Le 17 février 2017

INTRODUCTION

Conformément au Processus d’examen et d’approbation des règles et de l’information figurant dans le formulaire 21-101F1 (le « Protocole »), CNSX Markets Inc (« CSE ») a adopté, et la Commission des valeurs mobilières de l’Ontario (« CVMO ») a approuvé, des modifications importantes au système de négociation de la CSE.

Le 22 septembre 2016, la CSE a publié l’Avis 2016-014 – Appel de commentaires – Modification des fonctions et caractéristiques du système de négociation (l’« Avis »). La CSE a proposé de mettre en œuvre de nouvelles fonctions et caractéristiques lors du lancement de son nouveau système de négociation en octobre 2016. La période de consultation publique a pris fin le lundi 24 octobre 2016.

La CSE a reçu quatre lettres de commentaires publics.  Conformément à l’alinéa 8b)ii) de l’Annexe C « Processus d’examen et d’approbation des règles et de l’information contenue dans le formulaire 21-101F1 et ses annexes » de l’ordonnance de reconnaissance de la CSE (le « Protocole »), la CSE a préparé un résumé des commentaires publics et une réponse à ces commentaires (Annexe A de la présente lettre).

Des modifications à la fonction de participation proposée ont été apportées en réponse aux commentaires reçus.  Les modifications à la fonction de participation proposée sont énoncées ci-dessous.

DESCRIPTION DE LA FONCTION PROPOSÉE

Ordres liés : ordres liés au marché et ordres au point médian

Les ordres liés au marché sont des ordres d’achat ou de vente « liés » à un échelon de cotation en sens inverse du meilleur cours acheteur et vendeur national (« MCAVN ») du marché consolidé.  Le MCAVN consolidé comportera les cours du marché protégé.

Les ordres au point médian sont des ordres d’achat ou de vente liés au point médian du MCAVN du marché consolidé.

Les ordres liés peuvent être négociés à un échelon de 0,5 cent. Le cours d’exécution sera recalculé selon les variations du MCAVN, sujet à toute limite de cours de l’ordre.

Les ordres liés ne figurent pas au registre et ne sont pas diffusés publiquement, mais sont acheminés à la Réglementation des marchés de l’OCRCVM lors de leur saisie ou de leur négociation.   Les variations du cours de l’ordre résultant de variations du MCAVN ne seront pas signalées à la Réglementation des marchés de l’OCRCVM.

• Dans un marché unilatéral, ou un marché figé ou croisé (sans MCAVN valide), les ordres liés ne seront pas négociés.
• Les ordres liés saisis alors qu’il n’y a pas de MCAVN valide seront acceptés, mais aucun cours d’exécution ne leur sera assigné avant qu’il y ait un MCAVN valide.
• Les ordres liés sont toujours passifs et suivent les règles normales d’allocation (cours, société, heure).
• Les ordres liés peuvent être saisis lors de n’importe quelle séance au cours de laquelle la saisie d’ordres est permise, mais peuvent être négociés uniquement dans le cadre d’une négociation continue et si la séance d’appariement des ordres liés a été activée. (Séance de négociation d’ordres liés de 9 h 30 à 16 h)

Participation du teneur de marché

La participation du teneur de marché est une fonction optionnelle qui permet au teneur de marché de négocier automatiquement jusqu’à un maximum de 40 % du volume de lots réguliers de certains ordres entrants.

• La fonction de participation lui allouera un pourcentage du volume de lots réguliers (en pourcentage des ordres entrants) de chaque ordre entrant équivalent ou inférieur à la garantie d’exécution minimale (GEM). 
• Les teneurs de marché peuvent définir un pourcentage de participation d’un minimum de 0 % et d’un maximum de 40 %, et peuvent définir un volume négociable total maximal côté acheteur ou côté vendeur.
• Le statut de participation du teneur de marché pour un titre n’est pas dévoilé publiquement, mais est acheminé au GPC FIX (Réglementation du marché de l’OCRCVM).
• L’allocation entre les ordres inscrits au registre et le teneur de marché débutera par le premier lot régulier, qui sera négocié avec le registre.  Les ordres entrants de moins de deux lots réguliers ne seront pas soumis à la participation, puisqu’un ordre composé d’un seul lot régulier sera envoyé au registre.  Un ordre de deux lots réguliers sera divisé ainsi : un lot régulier ira au teneur de marché et un lot régulier ira au registre.  Cette situation est la seule exception à la règle de participation maximale de 40 %, et elle est conforme à la fonction existante de la Bourse de Toronto. Exemples (avec une participation définie à un maximum de 40 % et un lot régulier de 100 actions) :

• 100 actions : l’ordre sera négocié avec les ordres en attente uniquement;
• 200 actions : l’ordre sera négocié à 50 % avec le teneur de marché, et la partie restante avec les ordres en attente dans le registre;
• 300 actions : l’ordre sera négocié à 33,3 % avec le teneur de marché, et la partie restante avec les ordres en attente dans le registre;
• 400 actions : l’ordre sera négocié à 25 % avec le teneur de marché, et la partie restante avec les ordres en attente dans le registre;
• 500 actions : l’ordre sera négocié à 40 % avec le teneur de marché, et la partie restante avec les ordres en attente dans le registre.

Les lots irréguliers exécuteront tous les ordres inscrits au registre, et ce, à un cours égal au cours acheteur ou vendeur, ou supérieur à celui-ci, puis toute portion de lot irrégulier n’ayant pas été exécutée dans le registre sera automatiquement négociée avec le teneur de marché.

MISE EN OEUVRE

La fonction de participation et les ordres liés seront disponibles dans l’environnement d’essais généraux de la CSE avant leur mise en œuvre.  Nous prévoyons que les fonctions seront envoyées à l’environnement de production le 12 mai 2017.

SOMMAIRE DES COMMENTAIRES

La CSE a reçu quatre lettres de commentaires.  Un résumé des commentaires ainsi que les réponses de la CSE sont joints à l’Annexe A.  

Appendix A

Notice 2016-014 - Request for Comment - Amendments to Trading System Functionality & Features

Summary of Comments Received

The CSE received four comment letters: 

• ITG Canada Corp. (ITG); 
• The Trading Issues Committee of the Canadian Security Traders Association, Inc. (CSTA).
• Aequitas Neo Exchange Inc. (NEO), and
• TMX Group Limited (TMX).

We thank the commenters for submitting their views on the CSE proposals.  As there were no comments on the proposed peg order types, our response will address the comments related to market maker participation.  The comments can be summarized into four categories:

1. The comparison of the CSE proposal to existing marketplace features (comments from CSTA, TMX);
2. Requirement for price improvement when interacting with dark order types (CSTA, NEO);
3. Market segmentation and a call for a broad review of the subject (CSTA, ITG, NEO, TMX) 
4. Benefits of the Proposal (CSTA, ITG, NEO)

 

1.  Comparison of the CSE Proposal to Existing Marketplace Features

CSTA Comments

The CSTA observes “significant material differences” from the TSX RT participation feature and recommends that the CSE proposal be considered separate and distinct and “without specific precedent in Canada”.  The material differences cited are:

a) For orders of two board lots participation is 50%, and in the case of one board lot participation increases to 100%; and

b) TSX participation “obligates” the TSX RT to interact with a portion of “all market-bound active flow” rather than just MGF-eligible flow.

CSE Response

While the CSTA comments accurately identify the differences between the approach proposed by the CSE and the long existing TMX programme, the CSE disagrees with the conclusion that the differences are material. 

a)  While the maximum participation rate on the Toronto Stock Exchange has varied, whether the stated maximum rate was 40% or 50%, the participation level on a 2 boardlot order has been 50% by necessity.  For orders of less than 200 shares, the CSE is amending its proposal to provide that a 100 share order would interact with resting orders first.  The allocation process, as revised, would work as follows for incoming GMF-eligible orders:

• 100  shares (or one board lot), the order will trade with the resting orders only;
• 200 shares, the order will trade 50% with the Market Maker and the balance with the resting orders in the book;
• 300 shares, the order will trade 33.3% with the Market Maker and the balance with the resting orders in the book;
• 400 shares, the order will trade 25% with the Market Maker and the balance with the resting orders in the book;
• 500 shares, the order will trade 40% with the Market Maker and the balance with the resting orders in the book.

In each of these share allocation examples, the Market Maker will fill any oddlot portion that was not filled in the book.

b)  The CSE does not accept the characterization of RT participation with “all market-bound active flow” as an "obligation".   The participation feature may be turned on and off intraday at the discretion of the market maker on the TSX.    We address the concerns around order segmentation below.

NEO Comments

NEO also identifies GMF-Eligible orders vs MGF sized orders as a key difference between the CSE proposal and TSX feature.

CSE Response

We note that the discussion of this difference relates primarily to the segmentation discussion, below.

TMX Comments

The TMX comments address perceived differences in the market making programs overall, highlighting the TSX role as a listing exchange and the obligations to its issuers. 

a)      “This includes a market making program that imposes obligations on TSX Market Makers that are intended to help enhance the efficiency and effectiveness of price discovery, augment liquidity, fill liquidity ‘gaps’, support the order flow of the retail investor, provide a frontline role in monitoring trading activity, mitigate price volatility and help to stabilize the market, and support the efficiency and quality of the opening reference price in the industry. In contrast, CSE and Aequitas do not have these responsibilities to TSX issuers, nor would the market or issuers expect CSE or Aequitas and its market makers to take on a similar role for TSX listed securities.” [emphasis added]

b)     “[Point (a)] raises questions as to the intended objective of the CSE…market making programs when applied to securities they do not list.”

c)      Participation with only GMF-eligible orders, combined with the outstanding CSE fee proposal, appears “ultimately intended to better facilitate a “one-to-many” (i.e., “one-to-retail) experience.”

CSE Response

As a listing exchange, we recognize the importance of the relationship between an exchange and its issuers.  In broader terms, exchanges play a significant role in maintaining market integrity.  Furthermore, exchanges must conduct business and operations in a manner that is consistent with the public interest.  These principles apply whether a traded security is listed or simply traded on a particular exchange facility.  The existence of officially designated market makers on any trading facility is to improve the overall quality of the price discovery process.  By addressing the temporal discontinuities present in many listed securities (i.e. the fact that potentially matching buy and sell orders from “natural” market participants may not be entering the market at the same time), a market maker increases price continuity, reduces volatility, and encourages interested participants to cross the spread to trade because the market maker has committed bids and offers to the book and offers an automated execution for eligible orders.  The fact that market makers may be providing this service on multiple platforms does not detract from the beneficial effects of the service; instead, the benefits are enhanced by virtue of the additional contribution of executable orders and competition between or among the different marketplace market makers.

We also observe: 

a)      The obligation of the Registered Traders on the TSX is not a commitment to the issuer, but to the exchange.   While the exchange may have an obligation to the issuers, the explicit requirements for Registered Traders are not included in the listing agreement, but in the in the trading rules and policies.  CSE trading rules for Designated Market Makers include all of the same obligations, many of which are described in UMIR³.  The CSE trading rules apply to any security traded on the CSE, not just those that are listed on the CSE.

b)     The intended objective of the CSE is to increase the competitiveness of our venue by providing cost effective fills for retail clients.

 

2. Requirement for Price Improvement When Interacting With Dark Order Types

CSTA and NEO Comments

Both CSTA and NEO raised the issue of the participation proposal contravening the “Dark Rules”.  Whether circumventing “the letter and spirit” of the rules (CSTA) or resulting in “technical violations of UMIR section 6.6”, each of the two commenters takes the position that the automatically executed orders against the market maker are akin to the market maker having undisplayed orders in the book. 

CSE Response

Trades generated at the market against a designated market maker are not included in UMIR 6.6 or any of the relevant definitions.  This specific issue was raised prior to the introduction of UMIR 6.6 Provision of Price Improvement by a Dark Order, which was approved and implemented in 2012.  In response to an ITG observation that “market  makers  on  the  TSX  are  able  to  participate  in  small  trades  without  posting  visible  orders   and   offering   price   improvement” , IIROC stated “Market  makers  on  the  TSX  are  able  to  participate  in  certain  trades  as  a  result  of  the  Minimum  Guaranteed  Fill  and  automated  market  maker  participation  features.    However, market makers also have associated obligations not required of other participants.    The  market  maker  orders  are  system-generated  by  the  trading  system  of  the  TSX  in  accordance  with  marketplace  rules  that  have  been  approved  by  the  applicable  securities  regulatory  authorities  and  which  are  transparent  to  the  public.”⁴

 

3. Market Segmentation and a Call for Review

CSTA Comments

CSTA believes that the CSE participation model would worsen existing conditions related to segmentation of retail order flow by allowing a select counterparty to internalize flow to the exclusion of all other participants who may be resting orders in the market.

CSE Response

The use of the phrase “internalize flow to the exclusion of all other participants” is inaccurate.  The designated market maker is not internalizing flow as a dealer does in matching offsetting orders against each other away from the market and reporting the resulting trade as a cross to a marketplace.  Instead, under the participation feature in place at the TSX and proposed by the CSE, the participation feature is only triggered when a marketable order is entered into the market. These marketable orders are directed to the market, contributing to price discovery and liqudity, and will trade between 60% and 100% with resting orders in the book. 

ITG Comments

The CSE proposal takes segmentation one significant step further, and CSA needs to “define the goalposts of segmentation once and for all”.

CSE Response

While the CSE would participate in any review of the segmentation issue, the CSE proposal is squarely within the context of current rules and practices and should not be subject to delay outside the normal review process.

NEO Comments

NEO also observes that the market maker only interacts with “uninformed” flow, and can step ahead of posted visible liquidity 40% of the time.  Resting institutional orders will be exposed primarily to more “informed” flow.  NEO also highlighted the difference between the CSE Proposal and the TSX model; specifically that both retail and other types of orders can participate on the contra side of a "participation" trade with the market maker.

CSE Response

As with other arguments about segmentation, the premise here is that retail (or “GMF-eligible" or "uninformed") order flow is the most desirable type of order to trade against.  By giving the market maker an opportunity to interact with these orders through the use of the participation feature, the market maker is getting an unfair advantage over other market participants.  Other institutional orders are “exposed” in the book and therefore more likely to receive a fill from an undesirable counterparty.     Simply put, it is not unreasonable for market makers to be compensated for their obligation to post a continuous two-sided market with a reasonable spread at all times.  One of the means of compensating for the risks assumed is to permit the market maker to participate with eligible orders when sufficient size is present in the book.  This principle is of long standing in a number of auction market systems, including the TSX.  Providing a participation feature allows the market maker to offset the risks of meeting their broader market obligations. 

Additionally, it is worthwhile to note that GMF-eligible orders are not exclusively retail orders: under the CSE proposal, there is a strong likelihood that many "informed" or "institutional" or "directional" agency orders will meet the definition of eligibility for the GMF feature.

TMX Comments

TMX highlights the increasing interest in facilitating the segmentation of order flow on visible markets, and calls for a more robust discussion and policy review by regulators to define the extent to which segmentation is appropriate for the Canadian market.

CSE Response

Again, although the CSE would be a willing and active participant in any review of order flow segmentation in Canada, we submit that no sufficient reason to delay the implementation of the proposals, as amended in a non-material manner, has been put forward by the commenters.

 

4. Benefits of the Proposal

CSTA Comments

CSTA states that the “benefits of the CSE Proposal (if any) are targeted to a specific segment of the trading community (the CSE’s designated market makers), and in fact there are clear disadvantages in the Proposal for participants that would post orders on CSE, including protected orders in CSE listings.”

CSE Response

Retail clients benefit in that there would be a high degree of certainty of an execution at the existing bid/offer spread, through the operation of the participation feature, under the GMF feature and by interacting with posted liquidity.  Those that would post orders on the CSE can still participate with 60% to 100% of all incoming GMF-eligible orders, and 100% of all other orders.

ITG Comments

ITG states that

• “any trader or algo that appreciates adverse selection risk will reduce the size posted on the visible market, at any time, to reduce the risk of negative trades.  This will result in less available liquidity at the NBBO.”
• The clear winners are the market makers, who have been “granted a low risk mechanism to trade with their preferred counter party, and the market facilitating this activity.  The losers are the market participants who openly quote for trades at the risk of trading with any counter party, and are less able to transact with retail flow.”
• ITG comments that there is little evidence to suggest that any long term investors will benefit from this proposed program, but is very confident that institutional flows will be harmed and therefore questions the purpose for the proposal.

CSE Response These thoughts are based on the premise that “informed” traders want to trade against “uninformed" traders and that the "informed" trader will take a number of steps to reduce his or her exposure to other such informed flow.  This may well be the case.  These traders may reduce the size offered in the book to reduce the risk of being adversely selected.  There are a number of other "segmentation" issues that such traders will have to address:  the broker preference rule, the order handling rules, and the existence of dark order types and dark pools.  In order to provide a reasonable expectation of a good quality execution experience for the GMF-eligible order, the CSE is proposing a system whereby the market makers have obligations to fill GMF-eligible orders when there are insufficient resting orders at the same price.  It is not unreasonable to permit them to interact with those same orders when the size is sufficient.  This is particularly true when the market may be one sided with informed flow, and the market maker is obligated to fill eligible orders on the opposite side of the market.

• If traders and algos reduce their posted size to “reduce the risk of negative trades”, then they will accomplish their objective of not trading with each other.  Liquidity for retail clients will be there in the form of the GMF, and given the maximum participation rate of 40%, there will be adequate flow for any traders that acknowledge the risks of being filled by entering an order in the book.
• Market participants who openly quote for trades are ostensibly doing so with the intention of receiving a fill, regardless of the nature or intent of the counterparty.
• The implication that institutional (directional, informed) flow will be harmed by a slight reduction in the ability to interact with uninformed flow is a reflection on the short term nature of that strategy.  Long term investors, retail or institutional, that are simply seeking a fill rather than following the trend, will not be disadvantaged.  In fact, they will benefit from improved fills and pricing.

TSX Comments

Participation with only GMF-eligible orders, combined with the outstanding CSE fee proposal, appears “ultimately intended to better facilitate a “one-to-many” (i.e., “one-to-retail) experience.” 

CSE Response

TMX did not provide comments on the outstanding fee proposal.  We note that these comments raise the issue of segmentation through pricing but, as the other commenters, remain silent on the benefit to retail investors. 

 

5. Additional Comments

CSTA Comment

In observing that the market maker will only trade against GMF-eligible flow rather than all inbound orders, CSTA states: “If the CSE’s existing resting orders are insufficient to fill the incoming active GMF-eligible (“retail”) order, the MM would then internalize the retail order as a Guaranteed Minimum Fill.  However, if an incoming active order is non-retail (non-GMF-eligible) the CSE market maker would avoid interacting with the active order, because the participation feature is constrained to GMF-eligible orders.”

CSE Response

We disagree with the characterization of a system-generated trade to guarantee a fill to retail client order as “internalization”, particularly given the significant regulatory concerns about, and restrictions on, real internalization.  As we indicate above, having assumed a variety of risks in meeting its obligations, it is not unreasonable to permit a market maker to interact with eligible orders when booked size is sufficient.

TMX Comment

TMX also suggests a broader policy discussion on whether an exchange should only be permitted to apply market maker obligations and benefits to the securities it lists. 

CSE Response

As we suggested above, the policy rationale for encouraging market maker participation suggests that multiple, competing, market makers will generate a superior market quality result.  We do not see any merit in the TMX’s position that formal market making programmes should be restricted to the exchange listing the particular security.

 

Summary

None of the letters submitted included comments on behalf of or in support of the retail client.  The participation feature will permit market makers to offset the risks inherent in a guaranteed fill facility, thereby promoting (among other benefits) a larger GMF commitment from the market maker. GMF-eligible flow will benefit from reduced costs through a greater certainty of execution, larger average fill size, and reduced adverse selection. 

The focus instead has been on segmentation of order flow, or more specifically, how market makers will have an unfair advantage by having the option to participate with small agency orders, but not similar sized institutional orders.  The most vocal arguments against segmentation are from those who perceive a specific advantage to trading against segmented order flow.  The perceived lack of fairness, expressed as an argument against segmentation, is a result of the fact that other orders will have less retail flow to trade against and may be forced to interact with “informed” flow.   The characterization of such trades as “negative fills” points to the strategies and motives of the market participants.  While these factors play a significant role in the development of technology and services offered by marketplaces, they should not have a material impact on regulation.  From a regulatory perspective, a resting order in the book is contributing to price discovery and is entitled to a fill from any counterparty, not just a desirable one.

The CSE has participated in a variety of formal and informal discussions with industry participants as a result of a recent fee proposal that has triggered considerable discussion about segmentation.  Participants with an institutional equity trading orientation have tended to criticize the CSE’s approach on the basis that it promotes an additional layer of “order segmentation”.  In other words, they believe restricting institutional client access to the predominately retail order flow represented by “GMF eligibility”, will result in increased trading costs for their clients and potential harm to the price discovery process.  Order segmentation is already deeply engrained in Canadian equity market structure.  The minimum guarantee fill facility at the Toronto Stock Exchange dates back many years.  The CSE’s GMF facility operates in similar fashion.  None of those orders may be accessed by the institutional community.  There is also segmentation of flow by dealer (the broker preference rule) and by size (the client order handling rule).  Institutional clients have seen an enormous amount of investment over the years in systems that are designed to permit them to locate the trade size they need without suffering the consequences of exposing their trading intentions to the broader market. 

The appropriateness of applying different rules, prices and trading modalities to the various kinds of orders present in the market is a well-accepted principle of Canadian equity market structure.   

³ Universal Market Integrity Rules, Part 1 – Definitions and Interpretation, “Marketplace Trading Obligations”

⁴ IIROC Notice 12-0130 – Rules Notice – Notice of Approval– UMIR – Provisions Respecting Dark Liquidity

(http://www.iiroc.ca/Documents/2012/77c0af22-004e-417d-9217-a160b3fcb5c5_en.pdf)