Liquidnet Canada, Inc.

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 Liquidnet Canada Inc. to update terminology and functionality of its one-to-one negotiation process and dark order book in connection to pre-trade transparency requirements.

Applicable Legislative Provisions

National Instrument 21-101 Marketplace Operation, ss. 7.1 and 15.1.

National Instrument 14-101 Definitions, s. 1.1.

Multilateral Instrument 11-102 Passport System, s. 4.7.

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions, ss. 3.2 and 3.6.

April 7, 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 LIQUIDNET CANADA, INC. (THE FILER)

DECISION

Background

The principal regulator in the Jurisdiction has received an application (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 pre-trade transparency requirements of s. 7.1(1) of NI 21-101 relating to (1) firm order information "displayed" to subscribers participating in the Filer's one-to-one negotiation functionality, including interaction between a manual contra on one side and a firm or conditional order on the other side, and (2) a firm resting order generating a firm-up request when matched with a conditional order, outside of a one-to-one negotiation process (the Exemption Sought). In connection with the grant of the Exemption Sought, the Filer also requests revocation pursuant to s. 144 of the Securities Act, R.S.O. 1990 (the Act), of the Filer's prior exemption from s. 7.1(1) of NI 21-101 for the Filer's one-to-one negotiation system, granted on or about June 29, 2012 (the 2012 Transparency Exemption).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission (OSC) is the principal regulator for the 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, Manitoba, British Columbia, Saskatchewan, New Brunswick and Quebec.

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

The Decision is based on the following facts represented by the Filer:

1. The Filer is a federal corporation formed under the laws of Canada and is a wholly owned subsidiary of Liquidnet Holdings, Inc., a corporation formed under the laws of the State of Delaware.

2. The Filer operates an alternative trading system (the ATS) as that term is defined in NI 21-101 that is registered as an investment dealer (or equivalent) with the OSC, the Autorité des Marchés Financiers of Quebec and the British Columbia, Alberta, Saskatchewan, Manitoba and New Brunswick Securities Commissions. The Filer is also a member of and regulated by the Investment Industry Regulatory Organization of Canada (IIROC).

3. The Filer is not in default of securities legislation in any jurisdiction.

4. The Filer, as an ATS, facilitates the execution of orders in Canadian equity securities by its subscribers, as defined in NI 21-101 and described in its Form 21-101F2 Information Statement Alternative Trading System (F2).

5. On June 29, 2012, the OSC granted the Filer's application for the 2012 Transparency Exemption, which covered the Filer's one-to-one negotiation system, including interaction between a manual contra on one side and a firm order on the other side. As stated in the 2012 Transparency Exemption, "[t]he manual negotiation system also can involve one trader manually negotiating against a firm order submitted for manual negotiation."

6. On September 21, 2012, the OSC approved the Filer's proposed broker blocks functionality, which involved interaction between a manual contra on one side, and a firm order submitted by a broker participant (a broker block order) on the other side. At that time, (i) the Filer did not distinguish between broker matches from other buy-side matches when notifying manual contras (buy-side traders) of block trading opportunities, (ii) the minimum order size for a broker block order was 50 standard trading units, and (iii) all orders, if executed, would be executed at the mid-price.

7. On June 23, 2017, the OSC approved the Filer's proposal to introduce conditional order functionality for broker block orders and approved an increase in the minimum order size for broker block orders to the lesser of 10,000 shares and Cdn$100,000 in value. In the case of a conditional broker block order, prior to execution against a manual contra, an automated firm-up request would be sent to the broker's systems to fully commit the shares to the Filer's ATS (if available).

8. On December 13, 2018, the OSC approved the Filer's proposal to begin distinguishing broker matches from buy-side matches when notifying manual contras (buy-side traders) of block trading opportunities.

9. As approved, and in its current state, the Filer's manual negotiation system, inclusive of broker blocks functionality, meets the three requirements specified in the 2012 Transparency Exemption (and the guidance set forth in subsection 5.1(4) of Companion Policy 21-101CP (CP 21-101)):

(a) Order details are shown only to the negotiating parties (which may include one manual contra, and one automated);

(b) Other than as provided in (a) above, no actionable indication of interest (IOI) or order is displayed by either party or the marketplace; and

(c) Each order meets the size threshold set by a regulation services provider as set out in subsection 7.1(2) of NI 21-101.

10. The Filer is seeking to update its existing exemption from subsection 7.1(1) of NI 21-101 to update terminology and better describe its current functionality, including: (1) firm order information "displayed" to subscribers participating in the Filer's one-to-one negotiation functionality (inclusive of broker blocks functionality), including interaction between a manual contra on one side and a firm or conditional order on the other side, and (2) a firm, dark order generating a firm-up request when matched with a conditional, dark order outside of a one-to-one negotiation process.

One-to-One Negotiation Functionality

11. The Filer's ATS offers subscribers the ability to enter into negotiations for the purchase and sale of large blocks of equity securities ("one-to-one negotiation functionality"). All negotiations on the Filer's ATS are on an anonymous basis. Communication between subscribers during a negotiation occurs through the Filer's ATS.

12. A key feature of the Filer's negotiation functionality is that communication of one party's trading interest to a contra party through the marketplace is conditioned on both sides communicating a bona fide intention to trade on the marketplace, with the bona fide intentions to trade being in the same symbol and on opposite sides. A negotiation may involve two manual traders or a manual trader on one side, and a firm or conditional resting order configured to interact with a manual contra on the other side.

13. The Filer interfaces with the order management systems of its subscribers, and receives indications from them. Two indications will be matched for negotiation on the Filer's ATS if certain conditions are met. An indication may also be matched for negotiation with a firm or conditional resting order configured to interact with manual contras utilizing the one-to-one negotiation functionality.

14. The Filer has disclosed to its subscribers that any subscriber who elects to utilize the Filer's negotiation functionality may interact with other manual contras as well as firm or conditional resting orders configured to interact with manual contras. By electing to utilize the Filer's negotiation functionality and actively respond to a trading opportunity, a subscriber has taken an affirmative action confirming his or her agreement to share his or her firm order information with negotiation contras, including both manual contras and conditional resting orders submitted by other subscribers. In this scenario, it is important to note that a subscriber does not create a firm order until after the subscriber has been matched with a negotiation contra. At that point, the subscriber takes an affirmative action to share his or her firm order information within the one-to-one negotiation functionality by electing to either submit or accept a negotiation proposal.

Negotiation between two manual traders

15. When the ATS's matching engine determines that a match for negotiation has occurred between two manual traders, it notifies those two manual traders of the match. This notification is communicated through the Filer's ATS software. The manual traders may then commence the negotiation process, which takes places on an anonymous basis through the Filer's ATS software.

16. When submitting a bid or offer in a negotiation, the subscriber specifies a price and quantity. The price can be a fixed price or a mid-peg price where the trade will execute at the mid-point of the protected national best bid and offer (PNBBO).

17. The quantity of shares during a negotiation is not displayed to the other side. The only information that a subscriber knows regarding a contra's quantity of shares is whether it is above or below the subscriber's minimum volume tolerance and above a minimum matching quantity for negotiation, as determined by Filer and approved by the applicable regulator, from time to time. As of the effective date of this Order, an order submitted by a manual trader during a negotiation must meet a minimum order size of either (i) greater than 50 standard trading units and greater than Cdn$30,000 in value, or (ii) greater than Cdn$100,000 in value (the Minimum Size Threshold).

Negotiation involving a manual trader and a firm or conditional order

18. When the Liquidnet Canada ATS's matching engine determines that a match for negotiation has occurred between a manual trader and a firm or conditional resting order created by another subscriber (a contra order), it notifies the manual trader of the match. This notification is communicated through the Filer's ATS software. The contra order may be a broker block order or an order created by a buy-side subscriber.

19. Upon receipt of the match notification, the manual trader may accept the opportunity to trade against the contra order at a price within that manual trader's specified price constraint, e.g., a mid-peg price. The quantity of shares is not displayed to either side. The manual trader knows only that the quantity of the contra order is above or below the subscriber's minimum volume tolerance and above the Minimum Size Threshold.

20. In the case of a firm contra order, a trade is executed upon acceptance of the proposal by the manual trader, provided that the firm contra order was not executed prior to the manual trader's acceptance of the proposal.

21. In the case of a conditional contra order, an automated firm-up request is sent to the submitting subscriber's systems to fully commit the shares to the Filer's ATS (if still available). The firm-up request sent to the submitting subscriber only provides symbol and side (i.e., buy or sell), while size and price are only inferable without precision (i.e., the submitting subscriber will be able to infer that the manual trader meets the Minimum Size Threshold set forth above and that the price is within any specified price constraint, e.g., at or better than the mid-point of the PNBBO).

22. When the manual trader offers contra-side liquidity to a conditional contra order, the firm-up request sent to the submitting 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 order).

23. The final step required to achieve an execution, (i.e., the firm-up by the subscriber that submitted the conditional), is not guaranteed and, therefore, execution is not a mere formality.

The Filer's negotiation functionality facilitates large-sized trades

24. If a negotiation on the Filer's ATS is successful, a trade is executed for the lesser of the quantities submitted by each side. The Minimum Size Threshold specified above for one-to-one negotiation facilitates large-sized trades and, consistent with the guidance set forth in subsection 5.1(4)(c) of CP 21-101 applicable to facilities that allow for negotiation between two parties, meets the minimum size requirement specified by a regulation services provider as set out in subsection 7.1(2) of NI 21-101.

Order details only displayed to the negotiating parties

25. In all cases, order details are displayed only to the two negotiating parties and limited information is provided to the Filer's employees involved in the operation of the Filer's ATS, as permitted under subsection 7.1(2) of NI 21-101. In the case of a manual trader interacting with a firm order submitted for negotiation, order details are displayed only to the manual trader, as there is no need to send a firm-up request to a subscriber who submits a firm order.

No actionable IOI or order is displayed by either negotiating party (other than to each other) or the marketplace

26. No actionable IOI or order is displayed by either negotiating party (other than to each other) or the marketplace.

Interaction between a firm resting order on one side and a conditional resting order on the other side, outside of a one-to-one negotiation process

27. A subscriber may also elect to create a firm or conditional dark resting order that may match and execute with other firm or conditional dark resting orders on the Filer's ATS, outside of a one-to-one negotiation process.

28. The Filer has disclosed to its subscribers that firm or conditional dark orders resting on its ATS will, by default, interact with other firm and/or conditional dark resting orders on its ATS. But a subscriber may elect a configuration whereby, outside of a one-to-one negotiation process, its firm dark orders will only interact with other firm dark orders, and not interact with dark conditional orders (the Firm Only Configuration). A subscriber who has declined to elect the Firm Only Configuration and actively chooses to submit a firm dark order to the Filer's ATS has affirmatively consented to display its firm order information to dark conditional resting orders submitted by other subscribers.

29. When a firm order matches with a conditional contra order submitted by another subscriber (the Conditional Subscriber), an automated firm-up request is sent to the Conditional Subscriber's systems to fully commit the shares to the Filer's ATS (if still available). In this circumstance, the firm-up request may be interpreted as a display of a firm order. The Conditional Subscriber will only receive a firm-up request if both the firm order and the matching conditional order meet the Minimum Size Threshold (greater than 50 standard trading units and $30,000, or greater than $100,000).

30. The firm-up request sent to the Conditional Subscriber's systems will only provide symbol and side (i.e., buy or sell), while size and price will only be inferable without precision, i.e., the Conditional Subscriber will be able to infer that the contra-side's price is within any specified price constraint (e.g., at or better than the mid-point of the PNBBO).

31. The firm-up request sent to the Conditional Subscriber will not allow that 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 order).

32. The final step required to achieve an execution, (i.e., the firm-up by the Conditional Subscriber), is not guaranteed and, therefore, execution is not a mere formality.

33. The Filer's existing compliance mechanism applicable to conditional orders includes periodic reviews of subscriber firm-up rates, with appropriate follow-up to subscribers to address any issues. In deciding what steps, if any, to take, the Filer will consider a subscriber's firm-up rate relative to all subscribers, whether there is adverse price movement to contra-side participants as a result of the failure to firm-up, potential frustration to other participants, the relative firm-up rates compared against different categories of contra interaction, and other relevant factors. This process provides an additional measure of protection in favour of the policy objective underlying section 7.1(1) of NI 21-101, i.e., fair access to pre-trade information, by allowing the Filer to monitor and combat abusive order-cancellation behaviour, which could indicate a Subscriber's attempt to gain an unfair informational advantage. Changes to the Filer's compliance mechanism are subject to notice to or approval by the OSC through filing an amendment to the relevant information provided in the Filer's F2.

Policy Rationale

34. Consistent with the 2012 Transparency Exemption, the orders executed in the Filer's one-to-one negotiation system, as described herein, are the culmination of a negotiation process. Because of the unique nature of the Filer's business, this decision will not impact the objective of the pre-trade transparency requirements of section 7.1 of NI 21-101.

35. This decision also remains consistent with the guidance provided in subsection 5.1(4) of CP 21-101, which 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 Minimum Size Threshold is an appropriate size threshold for an exemption contemplated in subsection 5.1(4) of 21-101CP.

36. 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, including those resulting from conditional orders. The Filer acknowledges that the impact of the approved functionality 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.

The decision of the principal regulator under the Legislation is that the 2012 Transparency Exemption is revoked and the Exemption Sought is granted provided that:

1) For orders displayed within the Filer's one-to-one negotiation process (as described herein),

(a) order details in the manual negotiation system of the Filer's ATS are shown only to the two negotiating parties;

(b) no actionable IOI or order is displayed by any negotiating party or by the marketplace, except that each party to a negotiation may communicate its bid or offer to the other negotiating party, as permitted under condition (a);

(c) all orders to which the Exemption Sought apply must meet the Minimum Size Threshold.

2) For a firm dark order sending a firm-up request to a conditional dark order outside of a one-to-one negotiation process,

(a) the firm dark order must meet the Minimum Size Threshold;

(b) the firm-up request conveys only symbol and side as known order elements, however information about price and quantity is not conveyed and may only be inferable without precision;

(c) the firm-up request does not enable the conditional recipient to determine whether the contra-side liquidity is immediately actionable;

(d) the Filer has disclosed to its subscribers that firm orders may, by default, interact with both firm and conditional orders on the Filer's ATS, but subscribers may elect a configuration whereby their firm dark orders will only interact with other firm dark orders, and not interact with dark conditional orders; by declining this available configuration and actively electing to submit a firm order to the Filer's ATS, a subscriber has affirmatively consented to also interact with conditional orders submitted by other subscribers.

(e) the Filer will analyze the impact of the approved functionality 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.

"Susan Greenglass"

Director, Market Regulation

Ontario Securities Commission