Advisor.ca attended the OSC-IIROC Market Structure conference today and live-tweeted the event. Here’s our summary of the session on the Canadian regulatory framework:
We’ve never not had price protection in Canada, but we haven’t had the multiple markets.
The U.S. order routing and pricing rules were very politicized and as a result were hurried. They’re problematic as a result.
Let’s ensure the transparency about where orders are coming from is there. And that we know where the orders are coming from.
Nobody wants a monopoly and one market for orders, but is it valuable to have a replica of the TSX? Other trading models serve other needs.
Central limit order books (CLOBs) will link markets but it will do it at a cost. Going to a CLOB does raise fears about monopolies and about the ability of orders to compete with one another.
Read: Trade execution under scrutiny
A consequence of technology is the guy I trade with can read my footprints. I can’t interact with orders that are detrimental to clients. Regulators need to understand investors want to choose the kinds of liquidity they interact with. And keep in mind we are competing with the U.S. and other worldwide markets. Not just ourselves.
In Canada, wholesale and retail trading markets don’t interact. It’s different elsewhere.
We don’t want to break up or do anything to kill the price discovery process. We have good retail participation and need to keep that.
If there’s a black book where people can interact with a different set of orders for a price, it crushes faith in the system.
Read: Anonymous trader
Dark pools will allow people to choose not to trade with certain market participation IDs. That can be problematic.
Institutional orders are more stable to trade against because they are for such large blocks of stock. Retail orders are inherently more volatile, which is why it can be problematic to let market participants avoid interacting with them.
The intent is for the first order in to get filled, but we don’t have time priority across markets. We have price priority, but time and price are linked. The market with the fastest matching engine is the most competitive.
Regulating this will require bold decisions, but if you set time priority, you automatically have a CLOB.
Read: Goldman to open Canadian dark pool
It would be bad to see liquidity go back to fragmented pools. That’s bad for Canada.
Most firms will meet with their best execution committees and conclude that despite the rule change, we still have to be in these markets.
The order protection rules are supposed to promote investor confidence, so it’s going to fall to firms to justify their order flows. The problem with testing the order flow with models is the data will be subject to interpretation.
Will best execution cause people to already want to do the things required by the Order Protection Rule? That’s what people need to think about.