OSC Staff Notice - Notice of Approval of Proposed Changes to Alpha Exchange Inc. (“Alpha”)
On April 16, 2015, the Ontario Securities Commission approved proposed amendments to Alpha's Trading Policies that were published on November 6, 2014{1}, subject to a revision and to terms and conditions noted below.
These amendments include the implementation of a randomized order processing delay on all orders other than "post-only" orders, which by definition cannot remove liquidity from the order book. The proposal as published referenced a randomized delay of 5-25 milliseconds. This was subsequently revised and the proposal was approved with a randomized order processing delay of 1-3 milliseconds.
In approving the Alpha order processing delay, the Commission imposed the following terms and conditions:
(1) orders displayed in the Alpha order book will not be considered to be protected under the Order Protection Rule ("OPR") in Part 6 of National Instrument 23-101 Trading Rules ("NI 23-101"); and
(2) Alpha will provide analyses of the impact of the Alpha speed bump on the market as required by the Commission.
The Alpha order processing delay and OPR
The Alpha order processing delay applies to all liquidity-taking orders and as such, it has a broad impact. In particular, feedback received on the Alpha order processing delay indicated that in the view of many commenters, it would add complexities and costs to order routing and execution if orders on Alpha were considered "protected orders" under OPR and related definitions in the Investment Industry Regulatory Organization of Canada's ("IIROC") Universal Market Integrity Rules ("UMIR").
OPR requires marketplaces to have written policies and procedures that are reasonably designed to prevent trade-throughs. The same policies and procedures requirement applies to marketplace participants that have assumed responsibility for compliance with OPR through the use of directed-action orders. As a result of the condition set by the Commission, it is staff's view that the policies and procedures of a marketplace or marketplace participant would be "reasonably designed" if they indicated that orders would not be routed to execute against better-priced orders displayed on Alpha when the Alpha order processing delay is implemented. We would not view the policies and procedures to be reasonably designed if they provided for trade-throughs of orders displayed on any other visible marketplace.
We note that the Commission, as well as the Canadian Securities Administrators (CSA), is currently examining the application of OPR more broadly with respect to any marketplace which imposes an order processing delay, and we expect to issue a proposal for comment in the near term.
Locked and Crossed Markets
Section 6.5 of NI 23-101 prohibits a marketplace or a marketplace participant from intentionally locking or crossing a protected order displayed on a marketplace. In this context, we would not view orders entered on other marketplaces that lock or cross orders displayed on Alpha to be "intentional".
Consolidated Data and UMIR
In the coming weeks, Commission staff will work with the information processor (IP) to ensure that there are replicated market data feeds available to all market participants for specific IP products -- one feed will contain data from all marketplaces displaying orders in exchange-traded securities and one will contain data from marketplaces displaying orders that are protected, excluding displayed orders on Alpha. It is our expectation that each of the Canadian Best Bid and Offer (CBBO), Consolidated Depth of Book (CDB) and Consolidated Last Sale (CLS) will be replicated to provide market participants with choice in the IP feeds available{2}. The work required by the IP will likely not be complete by the implementation date of the order processing delay on Alpha, and as such it is our expectation that Alpha will not pass on any costs for data purchased from the IP until such time as replicated market data feeds are made available{3}.
In addition, prior to the implementation of the order processing delay on Alpha, we will work with IIROC to ensure the finalization of any amendments to UMIR necessary to ensure consistency between the approval of the Alpha order processing delay under the associated conditions, and the application of UMIR.
Questions on the content of this Notice may be referred to:
{1} Published at (2014), 37 OSCB 9877
{2} Details regarding IP products can be found at: http://www.tmxinfoservices.com/tmx-datalinx/tmx-ip
{3} The TMX IP is a pass-through model, meaning that in addition to the TMX IP distribution fee, the market data fees (for level 1 and level 2, as applicable) and the data policies of the contributing marketplaces are passed through to the client.