Notice of Approval - Proposed Change to the MATCHNow Trading System - TriAct Canada Marketplace LP

Summary of Comment Received

MATCHNow’s Response

Continued innovation through features useful for institutional investors is beneficial to the Canadian trading ecosystem, and conditional orders may offer users latitude in their use of dark markets and generally assist in the management of liquidity fragmentation

MATCHNow agrees with and appreciates this comment

Additional measures should be considered to address users with systematically low firm-up rates

MATCHNow conducted exhaustive consultations with its Subscribers. We also conducted research with respect to how conditional orders are dealt with by marketplaces outside of Canada. We are confident that the compliance mechanism for conditional orders, as proposed in our filing, is a reasonable and effective starting point. Once conditional orders are implemented, we will consider modifications to the compliance mechanism, including additional or more onerous standards, but this will require observation of how conditional orders are being used over time. While we agree that stringent firm-up standards are desirable and necessary, and while we are open to allowing the compliance mechanism to evolve over time, we decline to make any additions to it at this time.

MATCHNow should incorporate average resting time metrics into the performance evaluation process to ensure that potential misuse is detected

As part of the proposed change, MATCHNow has already undertaken to track average resting time and provide it to our Subscribers in their Conditionals reporting. In addition, as alluded to in our filing, under our compliance mechanism, every fall-down will be counted in determining whether to impose a temporary trading restriction (which occurs when a Subscriber’s firm-up rate falls below 70% for the day, provided at least 10 orders have been sent), regardless of the average duration of the conditional orders that have fallen down. This is because matches occur only when contra liquidity is available; in other words, matching is event-driven. The possibility of deriving undue information from systematically cancelling conditional orders after an arbitrarily short resting time is essentially nil. The duration of the orders makes no difference. A Subscriber that falls below the 70% firm-up threshold will be penalized, regardless of the average resting time of its cancelled conditional orders.

Fall-down rates resulting from quote changes should also be subject to a materiality threshold (e.g. 5 tickets or 25 bps), as is it possible that a MATCHNow Subscriber might influence the NBBO and thereby obtain a “no-consequence” fall-down, while receiving an information advantage

As a general matter, market surveillance on the MATCHNow marketplace and enforcement of the Universal Market Integrity Rules (UMIR), including UMIR 2.2 (Manipulative and Deceptive Activities), which prohibits the type of improper price influencing alluded to in this comment, is the responsibility of IIROC, pursuant to MATCHNow’s Regulation Services Agreement with IIROC. See e.g. IIROC, Equity Marketplaces We Regulate (“[MATCHNow] has retained IIROC to [a]dminister and enforce the Universal Market Integrity Rules”). Nevertheless, MATCHNow will certainly discuss the issue raised by the commenter with IIROC, and we will take reasonable measures to ensure that IIROC has the appropriate data and tools to conduct surveillance to detect and prevent the type of potential price manipulation described in the comment.

Use of the typical minimum size requirement, i.e. greater than 50 standard trading units or $100,000 in value, should be reconsidered as such a minimum represents far too low a barrier to be consistent with the spirit of a conditional order, which exists to enable large “block sized” execution

The minimum size for conditional orders set forth in our proposed change is consistent with the minimum size threshold for Dark Orders (as defined in UMIR 1.1) that may be inferred from the requirements of UMIR 6.3 (Exposure of Client Orders) and 6.6 (Provision of Price Improvement by a Dark Order). This size threshold was enshrined in IIROC’s rules in 2012, with the approval of Canadian securities regulatory authorities, see e.g. IIROC Rules Notice 12-0130, Provisions Respecting Dark Liquidity (Apr. 13, 2012), ss. 2.4-2.5, and we see no reason to deviate from it at this time.

There is no clear consensus as to whether the enforcement of the firm-up rate would be more appropriate at the Subscriber level (as proposed) or at the Trader ID level

We have had discussions regarding this issue with numerous Subscribers, including many who have experience with conditional orders currently available in marketplaces outside of Canada (e.g. in the United States and Europe), and we received majority support from our Subscribers for firm-up rates being tracked at the Subscriber level. For this reason, we stand by the compliance mechanism as proposed, including, in particular, as it relates to the methodology for tracking firm-up rates.

Having additional fall-down deterring features (such as minimum resting times and long-term restriction abilities) would be appropriate under fair access requirements

As stated in our proposal, we believe our compliance mechanism is specific, transparent, and reasonable, as it strikes an appropriate balance by encouraging higher firm-up rates, and thus greater liquidity, without undermining “fair access” under section 5.1 of NI 21-101. It is possible that incorporating additional or more onerous requirements would be consistent with “fair access” requirements; and as noted above, we are certainly open to allowing the compliance mechanism to evolve in the future, based on how it functions once implemented. However, we decline to modify our proposal at this time.

Fair access rules through the establishment of a precedent may result in marketplaces “pushing the envelope” and creates many carve-outs and a lack of clarity as to permitted behaviors. Concurrently with any decision with respect to the proposed change, the OSC should publish guidance setting out the acceptable limitations on fair access with respect to conditional orders.

MATCHNow acknowledges the guidance provided in section 7.1 of the Companion Policy to NI 21-101 regarding the “fair access” requirements of section 5.1 of NI 21-101. Nevertheless, we agree that additional guidance from Canadian securities regulatory authorities regarding the specifics of what is expected of Canadian marketplaces under “fair access” requirements—including as it relates to specific measures deemed appropriate and/or required as part of a reasonable compliance mechanism for conditional orders—would be helpful.