Notice – Proposed Amendments and Request for Comments – TSX Inc.

TSX Inc. (the "Exchange") is publishing this Notice of Proposed Amendments and Request for Comments in accordance with the "Process for the Review and Approval of Rules and the Information Contained in Form 21-101F1 and the Exhibits Thereto" regarding certain changes to amend the repricing methodology of certain dark order types on TSX DRK, as described below (the "Amendments").

Market participants are invited to provide comments. Comments should be in writing and delivered by January 20, 2025 to:

Linda Zhang
Legal Counsel, Regulatory Affairs
TMX Group
100 Adelaide Street West, Suite 300
Toronto, Ontario M5H 1S3
Email: [email protected]
 

A copy should also be provided to:

Trading & Markets Division
Ontario Securities Commission
20 Queen Street West
Toronto, Ontario M5H 3S8
Email: [email protected]

Comments will be made publicly available unless confidentiality is requested. Upon completion of the review by staff at the Ontario Securities Commission ("OSC"), and in the absence of any regulatory concerns, a notice will be published to confirm approval by the OSC.

Background, Outline and Rationale for the Amendments

Trading activities in Canada are governed by the Universal Market Integrity Rules ("UMIR"), which is administered and enforced by The Canadian Investment Regulatory Organization. Section 6.6 of UMIR -- Provision of Price Improvement by a Dark Order states that an order entered on a marketplace may execute with a dark order provided that the order entered by the participant is executed at a "better price", unless the order meets certain volume and/or value thresholds or is otherwise excluded from the application of the rule. UMIR defines a "better price" as:

(a) in the case of a purchase, a price that is at least one trading increment lower than the best ask price at the time of the entry of the order to a marketplace provided that, if the best bid price is one trading increment lower than the best ask price, the price shall be at least one-half of one trading increment lower; and

(b) in the case of a sale, a price that is at least one trading increment higher than the best bid price at the time of the entry of the order to a marketplace provided that, if the best ask price is one trading increment higher than the best bid price, the price shall be at least one-half of one trading increment higher.

Section 6.1 of UMIR sets out these trading increments (colloquially referred to as "ticks"). Tick sizes are dependent on the price of the applicable security, and are as follows:

Under UMIR, when the spread (i.e. the difference between the buy (bid) and sell (offer) price) is: (i) more than 1 tick, the definition of a "better price" requires at least 1 tick (or trading increment) price improvement, and (ii) 1 tick, the definition of "better price" requires price improvement of half a tick.

For example:

• if the "buy" price is $1 and the "sell" price is $1.10, the price is improved to $1.09. This is because the security is over $0.50 and the spread is more than 1 tick, and therefore the improved price is 1 tick lower (i.e. $0.01 lower); and
• if the "buy" price is $0.25 and the "sell" price is $0.255, the price is improved to $0.2525. This is because the security is under $0.50 and the spread is 1 tick, and therefore the improved price is half a tick lower (i.e. half of $0.005 lower).

In contrast, this differs from the current methodology of certain dark order types on TSX DRK, where in certain situations, orders always reprice by a full tick regardless of the size of the spread. Due to this current methodology (i.e., repricing to 1 tick regardless of the size of the spread), where the spread is 1 tick, dark orders that might trade with small orders[1] will not execute because they will not reprice. However, the Amendments propose to amend the repricing behavior of these certain order types to allow for half tick price improvements.

Similarly, the current methodology of certain dark order types on TSX DRK provides that for certain large or small orders where the spread is 2 ticks or more, execution will occur at the far side when passive. While this is permitted under section 6.6 of UMIR, we are of the view that participants may prefer that passive orders also benefit from price improvement. The Amendments also propose to amend the repricing behavior of certain dark order types to allow for 1 tick price improvements (as permitted under UMIR) where the spread is 2 ticks or more. As a result, the Amendments will aim to benefit the passive side for price improvement for certain large or small orders.

Most of the liquid symbols in Canada typically have tight spreads. Our analysis has found that approximately 85% of all dark orders on TSX DRK[2] are small orders when the spread is 1 tick. The Amendments seek to refine our dark market trading practices to better align with market needs and regulatory frameworks. By implementing half tick price improvements as proposed under the Amendments, we anticipate that the likelihood of small order interactions will increase, thereby improving execution rates and overall market liquidity.

The charts below set out an overview of the affected order types and their existing behavior on TSX DRK, and their proposed behavior under the Amendments when the spread is 1 tick.

TSX DRK

The chart below sets out an overview of the affected order types and their existing behavior on TSX DRK, and their proposed behavior under the Amendments when the spread is 2 ticks or more.

TSX DRK

Please also see below for examples of the proposed repricing methodology using a PDL order with a limit price as an example.

Proposed Methodology Example 1: PDL Limit Large Order (Scenario 1 tick spread)

Proposed Methodology Example 2: PDL Limit Small Order (Scenario 1 tick spread)

Proposed Methodology Example 3: PDL Limit Large Order (Scenario 2 ticks spread)

We believe the proposed structure may help increase liquidity, reduce missed trading opportunities, and ensure a steady flow of trades, especially in markets where tight spreads are common.

Given that the definition of "better price" in UMIR already allows for an order to execute with a dark order at a half-tick increment when the spread is 1 tick and at a 1 tick increment when the spread is 2 ticks or more, the Amendments do not deviate from the fundamental principles of price discovery and market fairness.

Analysis of Impact

(ii) Impact on Market

The Exchange anticipates that the Amendments will have a positive impact on the market structure, members, investors, issuers or the capital markets. The Exchange believes that the Amendments are fair and reasonable, and will not create barriers to access.

The Exchange anticipates that the Amendments will enhance market liquidity, and improve trade execution.

(iii) Impact on Compliance with Applicable Securities Law

The Amendments will not impact the Exchange's compliance with applicable securities law and in particular the requirements for fair access and maintenance of fair and orderly markets. As noted above, the Exchange is of the view that the Amendments will support the maintenance of fair and orderly markets.

(iv) Impact on Clients and Service Vendors

Clients will not be required to update their routing methodology and trading strategies to take the Amendments into account. Technical developments are not required for clients to take the Amendments into account.

Consultations undertaken in formulating the Amendments

In formulating the Amendments, the internal governance process for the Exchange was followed, which included receipt of the appropriate management-level approval, and all applicable internal groups at the Exchange were consulted.

Alternatives Considered

No alternatives were considered.

Do the Amendments currently exist in other markets or jurisdictions

The Amendments currently exist in other dark markets in Canada and are aligned with price improvement requirements under UMIR.

Timing

The Exchange intends to implement the Amendments in Q1 2025, subject to regulatory approval and client readiness.

1 Section 6.6 of UMIR allows for the execution of an order with a dark order at a price other than a "better price", dependent on the volume and value of that order. Based on UMIR 6.6, for purposes of this notice a "small order" is defined as any order that is not a "large order", and a "large order" is an order (i) for more than 50 standard trading units and which has a value of more than $30,000 or (ii) which has a value of more than $100,000.

2 All TSX DRK data combines TSX-listed and TSXV-listed issuers.