Instinet Canada Cross Limited
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief from subsection 7.1(1) of National Instrument 21-101 Marketplace Operation to permit Instinet Canada Cross Limited to implement a new functionality that allows interaction between conditional orders and firm orders.
Applicable Legislative Provisions
National Instrument 21-101 Marketplace Operation, ss. 7.1 and 15.1.
Multilateral Instrument 11-102 Passport System, s. 4.7.
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions, ss. 3.2, 3.6, and 8.1.
March 1, 2023
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF INSTINET CANADA CROSS LIMITED (the Filer)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption pursuant to section 15.1 of National Instrument 21-101 -- Marketplace Operation (NI 21-101) from the requirement in subsection 7.1(1) of NI 21-101 to provide accurate and timely information regarding orders for the exchange-traded securities displayed by the marketplace to an information processor as required by the information processor or, if there is no information processor, to an information vendor that meets the standards set by a regulation services provider in respect of a Match Instruction Interaction (as defined below) (the Exemptive Relief Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application, and
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in Quebec, Manitoba, British Columbia, and Alberta.
Interpretation
Terms defined in National Instrument 14-101 -- Definitions, National Policy 11-203 -- Process for Exemptive Relief Applications in Multiple Jurisdictions, NI 21-101 and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation existing under the Canada Business Corporations Act.
2. The Filer's head office is in Toronto, Ontario, Canada.
3. The Filer operates an alternative trading system as defined in NI 21-101 (the ICX System).
4. The Filer is not in default of securities legislation in any jurisdiction.
Conditional Orders and the Match Instruction Feature
1. The Filer offers three order books to subscribers of the ICX System (Subscribers) to trade Canadian listed equities: the ICX Order Book, the ICX Conditional Order Book and the VWAP Order Book.
2. Conditional orders submitted to the Conditional Order Book are non-committed orders that generate an invitation to send a firm order when there is a contra side match (each, a Conditional Order).
3. If a possible match with a counterparty is detected by the ICX System in the ICX Conditional Order Book, both parties receive a "firm-up" invitation to send a firm order to the ICX Order Book to seek out an execution. The invitation received identifies the symbol and side of the trading opportunity but will not display the size of the order, the price or the identity of the potential counterparty.
4. A Subscriber may accept or reject the invitation. If a Subscriber rejects the invitation, the Conditional Order will be cancelled on the ICX Conditional Order Book. Subscribers who accept the invitation must do so within the time specified by the Filer, as such may be changed from time to time.
5. All executions on the ICX System are done at the Canadian Best Bid and Offer mid-point (the mid-point). The ICX System matches firmed up Conditional Orders where contra-side interest is eligible to match within the Canadian Best Bid and Offer by price, broker and time priority.
6. The ability to enter Conditional Orders starts at 9:30 am ET and ends at 4:00 pm ET (the Conditional Order Period).
7. The Filer intends to offer its Subscribers a new feature (the Match Instruction) to enhance its Conditional Order functionality. The Match Instruction feature will allow a firm order resting in the ICX Order Book (Firm Order) to automatically generate a firm-up invitation for a Conditional Order where the ICX System detects a potential match. In this circumstance, the firm-up invitation may be interpreted as a display of a Firm Order.
8. Match Instruction will be an optional feature. Subscribers may elect to activate Match Instruction functionality to have their Firm Orders interact with Conditional Orders (a Match Instruction Interaction). A Subscriber will need to affirmatively activate Match Instruction for it to apply to a Firm Order; otherwise, the ICX System will default the Firm Order to being opted out of the Match Instruction feature.
9. Match Instruction will facilitate large-sized trades, as it will (a) only be available as an option to Firm Orders with a minimum order size of either (i) at least 51 standard trading units and $30,000 in notional value, or (ii) at least $100,000 in notional value and (b) only interact with contra side Conditional Orders with a minimum order size of either (i) at least 51 standard trading units and $30,000 in notional value, or (ii) at least $100,000 in notional value (the Global Minimum Size).
10. Only the Subscriber who entered the Conditional Order can see the size of the order and the price, which they entered, and the contra side of a Conditional Order will not have any visible information.
Policy Rationale
11. The lack of visibility to the contra side of a Conditional Order will give Subscribers the opportunity to seek price improvement on large size orders while minimizing market impact. If the Filer were required to comply with the pre-trade transparency in subsection 7.1(1) of NI 21-101 in regards to a Match Instruction Interaction, the anticipated benefits of the functionality would be lost.
12. Guidance in subsection 5.1(4) of Companion Policy 21-101CP (21-101CP) outlines criteria that the securities regulatory authority may consider in granting an exemption from the pre-trade transparency requirements in subsection 7.1(1) of NI 21-101.
13. The Filer believes that the Exemptive Relief Sought can be granted because:
(a) a Match Instruction Interaction will be limited to the Global Minimum Size;
(b) a Match Instruction Interaction only becomes available if a Subscriber has opted-in to have its Firm Orders interact with a Conditional Order, and such opt-in must be done on an order-by-order basis or as a "default" for all the Subscriber's Firm Orders. Absent an affirmative Match Instruction opt-in, Firm Orders will be ineligible for Match Instruction Interaction;
(c) when an invitation is provided to the Subscriber who entered the Conditional Order in a Match Instruction Interaction, such invitation will only provide the symbol and side (i.e., buy or sell) of the Firm Order. The size of the Firm Order may be inferred without precision since the Match Instruction Interaction will be limited to the Global Minimum Size. Similarly, the contra-side's price may be inferred without precision since it will be at or better than the Canadian Best Bid and Offer mid-point;
(d) when an invitation is provided to the Subscriber who entered the Conditional Order in a Match Instruction Interaction, the Subscriber receiving the invitation will be unable to determine whether the contra side order is another Conditional Order or a Firm Order; and
(e) there can be no guarantee that the Subscriber who entered the Conditional Order will 'firm up' the invitation in a Match Instruction Interaction. In the meantime, the Firm Order remains eligible to trade with other Firm Orders on the ICX Order Book.
14. In addition, subsection 5.1(4) of 21-101CP provides that, in granting an exemption, the securities regulatory authority may consider whether each order entered on the marketplace meets the size threshold set by a regulation services provider as provided in subsection 7.1(2) of NI 21-101. As of the date of this Order, no size threshold has been set. However, the Filer believes that the Global Minimum Size is an appropriate size threshold for an exemption contemplated in subsection 5.1(4) of 21-101CP.
Decision
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Exemptive Relief Sought is granted provided that:
a. A Match Instruction Interaction will only apply to Firm Orders for which a Subscriber has affirmatively consented to using the functionality.
b. A Firm or Conditional Order will only be eligible for a Match Instruction Interaction where it meets the Global Minimum Size.
c. An invitation to firm up through a Match Instruction Interaction conveys only symbol and side as known order elements; information about price or quantity is not conveyed and may only be inferable without precision.
d. An invitation to firm up through a Match Instruction Interaction does not enable the recipient to determine whether the contra-side liquidity is immediately actionable.
e. The Filer will test the Match Instruction Interaction feature prior to implementation to ensure the functionality works as designed.
f. The Filer will analyze the impact of the Match Instruction Interaction feature and will share the results with the principal regulator. The manner and format of the analysis will be agreed to with staff of the principal regulator no later than 90 days after the signing of this decision.
"Michelle Alexander"
Manager, Market Regulation
Ontario Securities Commission