TriAct Canada Marketplace LP, operating as MATCHNow – s. 15.1 of NI 21-101 Marketplace Operation
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- application to vary and restate a decision granting relief from section 7.1(1) of National Instrument 21-101 Marketplace Operation to expand the definition of Firm Orders that can interact with conditional orders -- decision granted.
Applicable Legislative Provisions
National Instrument 21-101 Marketplace Operation, ss. 7.1 & 15.1.
Multilateral Instrument 11-102 Passport System, ss. 4.2 & 4.7.
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions, s. 3.6.
October 13, 2022
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 TRIACT CANADA MARKETPLACE LP, OPERATING AS MATCHNOW (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) to vary and restate the decision issued on June 7, 2021 granting an exemption pursuant to section 15.1 of National Instrument 21-101 Marketplace Operation (NI 21-101) from the pre-trade transparency requirements of section 7.1(1) of NI 21-101 (the 2021 Decision) to permit the implementation of the Filer's new system feature described below, by expanding the definition of "Firm Order," as set out in the 2021 Decision, to include the new feature, whereby a participating active firm dark order (an IOC order) may be opted in to automatically generate a firm-up invitation for a conditional order where the system detects a potential match (the Varied Exemption).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission (the OSC) 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 Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Quebec, Saskatchewan, and Yukon.
Interpretation
Terms defined in National Instrument 14-101 Definitions, National Policy 11-203 Process for Exemptive Relief in Multiple Jurisdictions (NP 11-203), NI 21-101, MI 11-102, or the Securities Act (Ontario) have the same meaning if used in this decision, unless otherwise defined. Additional capitalized terms are to be interpreted as defined below.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer is a limited partnership, established under the laws of Ontario, which is registered as an investment dealer under the securities legislation of Ontario and Alberta and approved by the OSC as an ATS. The Filer is a member of the Investment Industry Regulatory Organization of Canada.
2. Pursuant to two orders issued in 2007, one by the British Columbia Securities Commission (on behalf of itself and the securities regulatory authority or regulator in Manitoba, Newfoundland and Labrador, Nova Scotia, Quebec, and Saskatchewan) and one by the then-New Brunswick Securities Commission, and in accordance with the relief provided in section 4.8 of MI 11-102 and the respective Local Rule 12-501 applicable in the Northwest Territories, Prince Edward Island, and Yukon, the Filer is exempt from the requirement to register as an investment dealer in subsection 6.1(a) of NI 21-101 and is authorized to carry on business as an ATS in British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, the Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Quebec, Saskatchewan, and Yukon.
3. The Filer's principal place of business and head office are located in Toronto, Ontario.
4. The Filer is not in default of securities legislation in any jurisdiction of Canada.
5. The Filer, as an ATS, intends to offer its subscribers a new feature to enhance its existing conditional order functionality (Conditionals), by allowing Conditionals to interact with IOC orders, which are firm active "dark" orders, as well as firm passive dark orders, known as "Liquidity Providing" orders, in the MATCHNow system (referred to collectively herein as Firm Orders).
6. The Opt-In Feature is an optional feature. A subscriber will need to affirmatively activate it for it to apply to a Firm Order; otherwise, the system will default the Firm Order to being opted out for the feature.
7. Prior to the 2021 Decision, in the Filer's Conditionals functionality, a subscriber would receive a firm-up invitation when the system detected a potential match between or among two or more Conditionals; in accordance with the 2021 Decision, the Conditionals functionality was expanded to allow a subscriber to opt in to have its Liquidity Providing order automatically generate a firm-up invitation for a Conditional where the system detected a potential match between that opted-in Liquidity Providing order and Conditional.
8. The Filer has now proposed a new additional feature which would allow a subscriber to opt in to have an IOC order automatically generate a firm-up invitation for a Conditional where the system detects a potential match between that IOC order and Conditional, thereby expanding the definition of "Firm Order" set out in the 2021 Decision to include both Liquidity Providing orders and IOC orders (the Varied Opt-In Feature).
9. In these circumstances, the firm-up invitation generated by any opted-in Firm Order may be interpreted as a display of that Firm Order.
10. Section 7.1(1) of NI 21-101 provides that, when a marketplace displays orders of exchange-traded securities to a person or company, the marketplace must provide accurate and timely information regarding the displayed orders to an information processor or to an information vendor if an information processor is not available.
11. The Filer has requested an exemption from section 7.1(1) of NI 21-101 to be able to offer the Varied Opt-In Feature to its subscribers across Canada.
12. The Varied Opt-In Feature is subject to the following conditions:
1) The Varied Opt-In Feature will facilitate large-sized trades, as only Firm Orders that are at least 51 standard trading units and $30,000 in notional value or at least $100,000 in notional value may opt in to interact with Conditionals.
2) The Varied Opt-In Feature, to be activated, requires a subscriber to take the affirmative action of electing to have its Firm Orders interact with Conditionals (on an order-by-basis, or as a "default" for all Firm Order flow associated with a particular Trader ID).
3) When an opted-in Firm Order offers contra-side liquidity for a Conditional, the invitation to firm up sent to the subscriber that placed the Conditional will only provide symbol and side (i.e., buy or sell), while size and price will only be inferable without precision (i.e., the subscriber will be able to infer that the contra-side is at least 51 standard trading units and $30,000 in notional value or at least $100,000 in notional value, and that the contra-side's price is at or better than the mid-point of the Protected National Best Bid and Offer).
4) When an opted-in Firm Order offers contra-side liquidity for a Conditional, the invitation to firm up sent to the subscriber will not allow the subscriber to determine whether the contra-side liquidity is immediately actionable (i.e., the subscriber will be blind as to whether the contra-side order is a Firm Order or another Conditional).
5) The final step required to achieve an execution-namely, the firm-up by the subscriber that placed the Conditional-is not guaranteed and, therefore, execution is not a mere formality.
13. The Filer's existing compliance mechanism applicable to Conditionals suspends Conditionals trading, on a per-security basis, for the remainder of the trading day for a subscriber or sponsored user whose firm-up rate falls below 70% for the day, provided at least 10 firm-up invitations have been received by the subscriber or sponsored user. This compliance mechanism will treat all firm-up invitations uniformly, including those automatically generated by Firm Orders for which the Varied Opt-In Feature is activated. This provides an additional measure of protection in favour of the policy objective underlying section 7.1(1) of NI 21-101-namely, fair access to pre-trade information-by allowing the Filer to monitor and combat abusive order-cancellation behaviour, which could indicate a subscriber's or sponsored user's attempt to gain an unfair informational advantage. Changes to the compliance mechanism are subject to notice to and approval by the OSC through filing an amendment to the relevant information provided in the Filer's Form 21-101F2.
14. While the transparency requirements are fundamental to the marketplace framework in NI 21-101, there is a benefit for Canadian capital markets from the facilitation of large block-size trades.
15. The Varied Opt-In Feature is expected to encourage greater adoption of Conditionals by the Filer's subscribers and thereby provide more price-improved matching opportunities for large-sized orders, without any significant erosion of price discovery. Nevertheless, the Filer acknowledges that the impact of the Varied Opt-In Feature on the Canadian capital markets will be monitored over time, and any unanticipated negative impact will be addressed.
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.
Based on the Filer's representations above, the decision of the principal regulator under the Legislation is that the Varied Exemption is granted and the 2021 Decision is varied and restated as indicated herein, provided that:
1. The Varied Opt-In Feature will only apply to Firm Orders for which a subscriber has affirmatively consented to using the functionality.
2. A Firm Order will only be eligible for the Varied Opt-In Feature where it meets the applicable minimum size threshold (51 standard trading units and $30,000 or $100,000).
3. An invitation to firm up through the Varied Opt-In Feature conveys only symbol and side as known order elements; information about price or quantity is not conveyed and may only be inferable without precision.
4. An invitation to firm up through the Varied Opt-In Feature does not enable the recipient to determine whether the contra-side liquidity is immediately actionable.
5. The Filer will test the Varied Opt-In Feature prior to implementation to ensure the functionality works as designed.
6. The Filer will analyze the impact of the Varied Opt-In Feature and will share the results with the OSC. The manner and format of the analysis will be agreed to with OSC staff no later than 90 days after the signing of this decision.