Notice of Proposed Changes and Request for Comment - TriAct Canada Marketplace LP

TriAct Canada Marketplace LP ("TriAct") has announced plans to implement the changes described below on or about 60 days after approval. TriAct is publishing this Notice of Proposed Changes in accordance with the "Process for the Review and Approval of Rules and the Information Contained in Form 21-101F2 and the Exhibits Thereto". Market participants are invited to provide the Commission with comment on the proposed changes.

Comment on the proposed changes should be in writing and submitted by April 29, 2013 to

Market Regulation Branch
Ontario Securities Commission
Suite 1903, Box 55
20 Queen Street West
Toronto, ON M5H 3S8
Fax 416 595 8940
[email protected]

and

Torstein Braaten
Chief Executive Officer and Chief Compliance Officer
130 King St West, Suite 1050
Toronto, ON M5X 1B1
Fax 416-861-8768
[email protected]

Comments received will be made public on the OSC website. Upon completion of the Review by OSC staff, and in the absence of any regulatory concerns, notice will be published to confirm the completion of Commission staff's review and to outline the intended implementation date of the changes.

TriAct Canada Marketplace LP ("TriAct") has announced plans to implement the changes described below on or about 60 days after approval.

Any questions regarding the information below should be addressed to Torstein Braaten, Chief Executive Officer and Chief Compliance Officer, [email protected] 416-861-1010 extension 0260.

NOTICE OF PROPOSED CHANGES

TriAct is announcing that it intends to provide four new trading products on MATCH Now. These new features will provide increased flexibility to the price improvement options available for liquidity providers and additional terms on orders before they participate in a match.

TriAct continues to innovate and build on its leadership position within the Canadian dark trading landscape. TriAct is giving all subscribers more options on how they control their non-displayed orders and improve trading performance.

I. Summary of Proposed Changes

1. Minimal Price Improvement: This proposed order feature will allow Liquidity Providing orders to cap the price improvement to one cent when the spread is greater than two cents. For spreads less than 3 cents (or three trading increments) these orders will continue to trade at mid-point. For stocks priced under 50 cents the price improvement will be capped at a ½ cent (half of a trading increment) in-line with the trading increment.

Liquidity orders marked as Minimal Price Improvement will only trade with Marketflow orders when the spread is greater than 2 trading increments. When spreads are 2 trading increments or less, Liquidity orders marked as Minimal Price Improvement will trade with both Marketflow orders and other Liquidity orders at mid-point.

Subscribers have the option to configure their Marketflow orders/trader IDs to trade only at mid-point. These mid-point only Marketflow orders will not trade with Minimal Price Improvement orders when the spread is greater than 2 trading increments.

Please see appendix A for examples and appendix B for matching priorities.

2. Trading at the quote for listed Exchange Traded Funds (ETFs): This proposed order feature will allow "Large" ETF Marketflow Orders to trade with Passive Liquidity Providing Orders at the National Best Bid or Best Offer (NBBO). Trading at the NBBO (buy's trade at the ask and sell's trade at the bid) will be restricted to Canadian listed Exchange Traded Funds.

Upon entry to MATCH Now, Large ETF Marketflow orders will need to qualify as being of sufficient size so they do not require price improvement as per the Provisions Respecting Dark Liquidity{1}. Liquidity Providers will have the same order entry size restrictions as Large Marketflow orders.

The qualifying criteria is that the order be greater than 50 standard trading units (board lots) or have a value greater than $100,000 CAD. The order value for buys is determined by the original order quantity times the National Best Offer (NBO) and for sells is determined by the original order volume times the National Best Bid (NBB). MATCH Now will be applying the same qualifying filter to both Marketflow Orders and Liquidity Orders upon receipt before they can qualify for trading at the NBBO.

Once a Marketflow or Liquidity order is qualified upon receipt it will remain eligible to trade at the NBBO until it is completed or cancelled. All Marketflow orders are Immediate or Cancel ("IOC") orders and will only participate in one matching session with one or many contra Liquidity Orders.

The unfilled balances of Marketflow orders are returned to the Subscriber/Access Vendor for routing to other markets. The Large ETF Liquidity Orders will remain open until completed or cancelled.

MATCH Now will qualify each Liquidity order upon receipt even if it is a correction to a former order. If a Large ETF Liquidity Order volume or limit is corrected lower so that it is below the qualifying criteria it will be rejected by MATCH Now.

Liquidity orders offering mid-point price improvement will trade ahead of orders providing the minimal or no price improvement. Subscribers have the option to configure their Marketflow orders/trader IDs to trade only at mid-point even if the order qualifies as a large ETF order. These mid-point only Marketflow orders will not trade with either Minimal Price Improvement orders or at the quote ETF orders.

Continuing with current practice, MATCH Now will not execute these trades at the NBBO when the NBBO is locked or crossed.

Please see appendix A for examples and appendix B for matching priorities.

3.Minimum Tradelet Size: This proposed order term will set a minimum size for each pro-rata fill allocated against each counterparty. Traders can therefore control how their orders are traded in the MATCH Now pro-rata environment. The feature allows traders to prevent the size of any partial fill from being allocated below a threshold. Once the remaining volume of an order is equal to or less than the minimum tradelet size it will only execute against one counterparty to complete the order for the full amount remaining.

This feature will help decrease the number of allocation splits and increase the resulting size of each fill in a pro-rata market. The downside is that these orders may not access all the liquidity available in MATCH Now.

This feature can be set for both Liquidity and Marketflow orders as either an order message attribute or a default configuration per Trader ID.

Please see appendix A for examples and appendix B for matching priorities.

4.Better than limit: This proposed order term will only allow trades to execute at prices better than the limit submitted on the order. This is used to protect from trading in the dark when spreads adversely widen temporarily.

For instance if a stock is quoted at $10.00 to $10.01 and you expect to buy at mid-point, placing a better than limit buy order at $10.01 would ensure all buy fills occur at $10.005 or lower.

Placing a better than limit sell order at $10.00 would ensure all sell fills occur at $10.005 or higher.

This feature can be set for both Liquidity and Marketflow orders as either an order message attribute or a default configuration per Trader ID.

Please see appendix A for examples and appendix B for matching priorities.

II. Expected Date of Implementation

The four proposed order features and terms will be implemented into the MATCH Now production systems no earlier than 60 days after the review by the Ontario Securities Commission is completed.

The 60 day window will coincide with the availability of testing facilities as specified by National Instrument 21-101 for implementing material changes to our technology. This will provide subscribers and access vendors a reasonable amount of time to fully understand these features and prepare for implementation. All four features can be configured on request by Trader ID to allow access vendors additional time to implement any required changes.

A roll-out schedule will be communicated to subscribers along with information regarding test facilities. TriAct is planning to start testing with Subscribers and Access Vendors in the middle of April 2013 targeting a production launch for the first week of July 2013.

III. Rationale and Relevant Supporting Analysis

1) Minimal Price Improvement

Before the dark rule changes on October 15, 2012, a majority of the executions on MATCH Now were based on providing 20% price improvement to Marketflow orders. Since most of the executions on MATCH Now at that time were on stocks trading less than a three cent spread MATCH Now decided to execute all trades at mid-point.

Subsequent to our decision we received feedback that MATCH Now should offer more flexibility for the less liquid securities with wide spreads (e.g. a stock trading 10.00 to 10.10 would require five cents of price improvement under the new model). Alternatives were considered that included; reintroducing a percentage structure or allowing for a value to be submitted with the order (similar to a peg order). After discussions and feedback from our clients TriAct is proposing to allow traders to decide if they want to cap the price improvement to the minimums required by IIROC; as required by Universal Market Integrity Rule 6.6, Provision of Price Improvement by a Dark Order.

MATCH Now will offer this option to subscribers as an order attribute or as a default setting per trader ID.

Alternatively Subscribers have the option to configure their Marketflow orders/trader IDs to trade only at mid-point. These mid-point only Marketflow orders will not trade with Minimal Price Improvement orders.

2) Trading at the quote for listed Exchange Traded Funds (ETFs)

This product is being introduced to bring more liquidity to Canadian ETF trading. We have observed that ETFs usually trade close to their Net Asset Value which is typically between the National Best Bid and Best Offer. We also note that many of the active ETFs are trading at spreads of less than 3 trading increments and that a majority of the liquidity offered on the transparent markets are provided by Electronic Market Makers, Designated Brokers, and other professional traders. Since MATCH Now moved all executions to mid-point, we observed that the providers of liquidity in MATCH Now could easily trade at a price worse than NAV when all trades are being executed at mid-point. We therefore made the decision to propose an additional execution option for ETF liquidity providers that would allow them to trade at the NBBO.

For ETF Marketflow Orders to qualify for trading at the NBBO, the originating order sent to MATCH Now must be of sufficient size as designated by IIROC Universal Market Integrity Rules. The qualifying criteria is that the order be greater than 50 standard trading units (board lots) or a value greater than $100,000 CAD. The order value for buys is determined by the original order quantity times the National Best Offer (NBO) and for sells is determined by the original order volume times the National Best Bid (NBB). Qualifying Marketflow ETF orders will first trade with Liquidity Orders at the mid-point, followed by orders providing Minimal Price Improvement and will then trade at the NBBO after all price improvement opportunities have been captured.

TriAct has also decided to set the same qualifying criteria for the ETF Liquidity Orders than can be posted at the NBBO. TriAct wants to ensure Large ETF Marketflow orders receive sufficient size when they do not receive price improvement. By forcing Liquidity Providers to submit orders greater than 5,000 shares or $100,000 Subscribers will be confident that they will be able to get reasonable size executed against their Large ETF Marketflow Orders.

MATCH Now will offer this option to subscribers as an order attribute or as a default setting per trader ID.

Alternatively Subscribers have the option to configure their Marketflow orders/trader IDs to trade only at mid-point. These mid-point only Marketflow orders will not trade with Minimal Price Improvement orders either.

3) Minimum Tradelet Size Executed:

This feature will allow a subscriber to set the minimum size for each pro-rata allocated fill reported against each counterparty. Traders can therefore control how their orders are traded in the MATCH Now pro-rata environment. Minimum Tradelet Size can be set in conjunction with Minimum Shares and both restrictions will apply to each matching session. Subscribers can provide a minimum tradelet size in their order instructions or set a pre-defined default for their Trader ID.

4) Better than Limit:

The Better than Limit order is only eligible to trade at a better price than the limit set by the order. The execution price is still determined by the amount of price improvement level set by the terms of the Liquidity Providing orders. Better than Limit orders will simply not trade at the limit price. Subscribers will be able to indicate this condition on their limit price in their order instructions or by a pre-authorized default for their Trader ID.

IV. Expected Impact on Market Structure, Members, Investors, Issuers and the Capital Markets

These four proposed features will not change Canadian market structure. MATCH Now continues to offer equal, fair and unrestricted access to dark liquidity, mid-point pricing so that Canadian Investment Dealers can get more trades done at better price and achieve better execution results. As a non-displayed market MATCH Now strives to provide innovation to reduce market impact and provide price improvement in a cost effective alternative to the displayed markets. MATCH Now provides these benefits to help Canadian Investment Dealers achieve their objectives of Best Execution. After the introduction of the proposed features and terms, Subscribers can always continue to restrict their MATCH Now trading to mid-point pricing on all trades.

Subscribers will be able to request, at their option, to take advantage of the proposed features or restrictions being offered by sending instructions with their orders or requested TriAct to configure their Trading ID defaults. The new price improvement tiers will provide subscribers with more choices to ensure that the amount of price improvement is aligned with the trading characteristics of the security (i.e. Exchange Traded funds, Highly Liquid and Illiquid Securities all have different trading characteristics and require different market models.)

V. Impact on Exchange's Compliance with the Securities Law, Especially Fair Access and Maintenance of Fair and Orderly Markets

The proposed Minimal Price Improvement and Trading at the quote for ETFs conform to the regulations outlined in "Provisions Respecting Dark Liquidity". MATCH Now does not have any displayed orders so there will be no conflict with providing priority to a visible order book when trading on MATCH Now.

The Minimum Tradelet Size feature simply provides a variance to the implementation of a minimum quantity terms order that is a common feature across all Canadian Marketplaces (lit and Dark) as a special terms order.

The Better than Limit order conforms to the Universal Market Integrity Rule 6.1(1) that currently prohibits an order to "be entered to trade on a marketplace at a price that includes a fraction or a part of a cent other than an increment of one-half of one cent in respect of an order with a price of less than $0.50". The Better than Limit order is a special terms order type that simply prevents the order from being included in a match at the limit price.

All of the four proposed order features are dark orders and by definition will not be displayed and therefore will not contribute to quote traffic or have an adverse impact on the maintenance of fair and orderly markets.

VI. Consultation and Review

TriAct has received feedback from many of its subscribers and its User Advisory Committee requesting more price improvement options.

TriAct has also received feedback that traders would like the option to place terms or restrictions on their orders to decrease the number of pro-rata allocation splits. These traders are willing to miss trading opportunities that would allocate below a threshold (e.g. less than 300 shares). By decreasing the number of splits the average order fill size will increase and there will be subsequent savings on trade reporting to CDS.

The Better than Limit feature was designed to conform with UMIR 6.1(1) while still ensuring that a trader will only trade at the mid-point fractional price they are targeting at order entry. These traders do not want to worry about a flickering quote setting an execution price higher than their original intentions based on the quote at order entry.

VII.Technology Implementation Impact on Members and Service Vendors

The technology implementation impact will be minimal, Subscribers will be able to set these features by providing TriAct with standing instructions for one or many of their Trading IDs until their technology or Access Vendors can include the settings in the execution management systems or algorithms. These features are designed to allow for Trader ID configuration and order by order override. This approach will provide the flexibility for each subscriber to set their development priorities while still making all the features available to all Subscribers at the same time.

VIII Alternatives Considered

MATCH Now provides a unique source of dark liquidity for Canadian investment dealers looking to achieve best execution on their equity trades. The proposed features provide more options to traders, increasing flexibility of how they want to trade on MATCH Now. The implementation of these features allows a Subscriber to continue trading in the current model or selectively take advantage of the new features. There are always different ways to provide solutions to the feedback we have received from our customers and the User Advisory Committee so we take this opportunity to present these features and seek comment and or support on these initiatives.

IX. Comparable Rules or Products offered in domestic and foreign markets

In Canada the Provisions Respecting Dark Liquidity set the requirement for meaning full price improvement when small orders trade with dark orders. The Canadian rules have set a higher requirement than set in the United States and most Global Markets. Many jurisdictions are considering similar price improvement rules (i.e. the "trade at rule" in the US). The proposed Minimal Price Improvement feature would meet the current Canadian requirements as well as the ones being discussed in the US and other jurisdictions.

Trading ETFs at the quote provides Investment Dealers an alternative to the upstairs markets and the limitations around pre-arranged crosses for larger orders. Currently we observe significant amounts of ETF block trades are executed at the quote or through negotiate principal or agency executions. In many jurisdictions these trades are done over-the-counter with little to no post trade transparency.

All of the Canadian display markets allow participants to post intentional crosses and the recent UMIR Guidance has exempted fractional cross reporting as long as the provision for price improvement are followed when required. Alpha Instraspread currently offers trading "against both Dark and Lit orders at the NBBO"{2}

The proposed Minimum Tradelet Size feature is a differentiating feature that increases the executed pro-rata allocation fill sizes at the option of the trader. Alpha Intraspread has an allocation rule "Smart-Size Priority" that provides preference to orders with sufficient size to complete an incoming order. In a case where a participant has multiple clients that are equally eligible to trade, MATCH Now will pro-rate fairly across all of the Subscriber clients when allocating the larger fill size and therefore rewarding the provision of size and equal treatment of order priority.

To our knowledge, Better than Limit orders will be a unique to Canadian Markets. In other jurisdictions orders can be entered and executed off exchange (OTC Markets) at fractional prices and are not restricted to order entry requirements set for displayed markets (i.e. Reg NMS and decimalization in the US prohibits fractional quoting and trading on Exchange). In Canada UMIR 6.4 requires all orders not be entered in fractional increments even though trades can execute at fractional increments when trading with a dark order at a one increment spread.

{1}http://www.securities-administrators.ca/aboutcsa.aspx?id=1045&terms=Provisions+Respecting+Dark+Liquidity April 13, 2012

{2}http://www.alphatradingsystems.ca/en/IntraSpreadOrderBook_W

 

Appendix A

Examples to illustrate how the proposed Feature will work

Minimal Price Improvement:

Example #1 ten cent spread: Marketflow Buy order for 2,000 XYZ at price limit of $10.12 is sent to MATCH Now. The current NBB is 5,000 shares at $10.00 and the NBO is $10.10 for 900 shares. There are two resting liquidity orders in MATCH Now a sell for 1,000 XYZ at market to trade at mid-point and a sell for 4,000 XYZ with a price limit of $10.07 marked with Minimal Price Improvement.

The Marketflow order will receive two fills: 1,000 @ $10.05 (mid-point) and 1,000 at $10.09 (NBO less 1 increment). The Marketflow order has been filled for an average price of $10.07 which is better than the posted offer and has not impacted the market.

Example #2 two cent spread: Marketflow Buy order for 2,000 XYZ at price limit of $10.02 is sent to MATCH Now. The current NBB is 5,000 shares at $10.00 and the NBO is $10.02 for 900 shares. There are two resting liquidity orders in MATCH Now a sell for 1,000 XYZ at market to trade at mid-point and a sell for 4,000 XYZ with a price limit of $10.00 marked with Minimal Price Improvement.

The Marketflow order will receive two fills: 1,000 @ $10.01 (mid-point) and 1,000 at $10.01 (NBO less 1 increment or in this case mid-point). The Marketflow order has been filled for an average price of $10.01 which is better than the posted offer and has not impacted the market. The Minimal Price Improvement order trades at the same price and priority as the mid-point order.

Trading at the quote for listed Exchange Traded Funds (ETFs)

Example: Marketflow Buy order for 6,000 XIUs at price limit of $18.61 is sent to MATCH Now with the order attribute permitting the order to trade at the NBO. The current NBB is 1,000 shares at18.60 and the NBO is 18.61 for 500 shares. There are two resting liquidity orders in MATCH Now a sell for 2,000 XIU at market to trade at mid-point and a sell for 20,000 XIU with a price limit of 18.61 to trade at the offer price.

The Marketflow order will receive two fills: 2,000 @ $18.605 (mid-point) and 4,000 at $18.61 (NBO). The Marketflow order has been filled for an average price of 18.6083 which is better than the posted offer and has not impacted the market.

Minimum Tradelet Size Executed

Example: A Marketflow buy order for 1,000 ABX at a limit price of $29.60 is sent to MATCH. There are 10 sell orders resting in MATCH Now. The Marketflow buy order maybe at worst is allocated as 10x100 share fills due to the pro-rata allocation methodology.

By specifying a Minimum Tradelet Size of 400 shares, this trade will be allocated to no more than 3 fills.

Scenario A: 2x400 fills and a 1x200 fill (Since the first 2 fills leave 200 shares, the Min Tradelet Size is automatically reduced to the remaining quantity of 200 shares)

Scenario B: a 1x1,000 fill

Scenario C: a 1x600 fill and a 1x400 fill

The fill quantity scenario is based on what liquidity is resting in MATCH Now.

Better Than Limit

Example # 1, a buy order: Stock NBBO quote is $10.00 to $10.01, you place a buy order in MATCH Now with a $10.01 limit expecting fills at the mid-point of $10.005. The quote widens out to $10.00 to $10.02, mid-point is now at $10.01 which equals your limit price. By specifying the order as a better than limit order, you will not trade at your limit price of $10.01 when the quote fluctuates allowing you to control how you use MATCH Now.

Example # 2, a sell order: Stock NBBO quote is $10.00 to $10.01, you place a sell order in MATCH Now with a better than $10.00 limit expecting fills at the current mid-point of $10.005 or better. The quote widens out to $9.99 to $10.01, mid-point is now at $10.00 which is at your limit price but your order cannot trade until the mid-point is $10.005 or better. If the quote moves in your favour to $10.00 to $10.02 your sell order can trade at the $10.01 the new mid-point. By specifying the order as a better than limit order, you will always trade at prices better than your limit price of $10.00.

 

Appendix B

Order Priority and Allocation Methodology

Match Allocation Priority for Marketflow and Liquidity ("LP") Orders is based on Broker and Size. Orders that are executed at each level of a match will be allocated based on a pro rata basis while maximizing participation on every trade. Each tradelet (partial fill reported) will be a minimum of one board lot. For the pro-rata algorithm, the allocation of tradelets will be randomized for orders of equal priority. The first four levels of Matching Priority apply to all types of matches (i.e. Market Flow to Liquidity orders and Liquidity to Liquidity orders). The fifth and sixth levels of Matching Priority are only relevant to the remaining balance of a Large ETF Marketflow order that is trading with a Large ETF Liquidity order that is posted at the NBBO.

Matching Priority	Match Allocation	Match Details
First	Traded at mid-point same broker	Broker preferencing applied to matching (priority to execution broker for attributed and anonymous orders.) Fills will be allocated on a pro-rata basis within the same broker.
Second	Traded at mid-point among brokers	Remaining unfilled quantity will be matched on a pro-rata basis across all other brokers.
Third	Traded at Minimal Price Improvement{3} with same broker	Broker preferencing applied to matching (priority to execution broker for attributed and anonymous orders.) Fills will be allocated on a pro-rata basis within the same broker.
Fourth	Traded at Minimal Price Improvement with same among brokers	Remaining unfilled quantity will be matched on a pro-rata basis across all other brokers.
Fifth (only available to Large ETF Marketflow orders trading with Large ETF LP Orders)	Traded at the national best bid or best offer with same broker	Broker preferencing applied to matching (priority to execution broker for attributed and anonymous orders.) Fills will be allocated on a pro-rata basis within the same broker.
Sixth (only available to Large ETF Marketflow orders trading with Large ETF LP Orders)	Traded at the national best bid or best offer among brokers	Remaining unfilled quantity will be matched on a pro-rata basis across all other brokers.

Order Priority is not based on price or time priority. Price limits on an order will determine if the order is eligible to participate in the match. The execution price is determined by the amount of price improvement provided by the LP order(s) based on the national best bid or best offer.

Orders with the Better than Limit attribute will have equal standing in pro-rata allocation as other limit orders if they can be included in a match. The Better than Limit attribute does not change the priority of the order, it just determines if the order is tradable or not.

Trading restrictions, such as minimum size or minimum tradelet size do not change the priority of the order in the allocation process if the restrictions can be met.

Broker Preferencing allocation methodology:

Attributed and Anonymous Orders	Preferenced by execution broker
Jitney Orders	No Preferencing by broker

{3} Minimum Price Improvement as required by IIROC Provisions Respecting Dark Liquidity: "a minimum of one trading increment except, when the difference between the best ask price and the best bid price is one trading increment, the amount shall be a minimum of one-half of one trading increment" (http://www.securities-administrators.ca/aboutcsa.aspx?id=1045&terms=Provisions+Respecting+Dark+Liquidity, April 13, 2012)