Jitney preferencing, comparable to circular trading, impedes fair marketplace access and should not be facilitated, says the Ontario Securities Commission.
A jitney order refers to the execution and clearing of orders by one member of a stock exchange for the account of another member. For example, a small investment dealer that can’t support a trader on the exchange will have a larger dealer execute its orders. The smaller dealer then pays a reduced commission percentage.
In today’s minutes, OSC staff admitted their concerns regarding order allocation methodologies that allow jitney orders to participate in firm priority. In particular, they’re “concerned that by permitting two dealers to bypass committed orders in the book, jitney preferencing could lead to the formation of ‘liquidity consortiums.’ ”
Staff adds, “Dealers could make their order flow available to a select group of market participants through jitneying.” In some countries, that activity is considered tantamount to trading ahead, or stepping ahead, of limit orders placed by other public customers.
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Like circular trading — in which a sell order is executed at the same time as an offsetting buy order is entered — this particular type of preferencing can illegally exclude competition.
The OSC found jitney preferencing is supported on three marketplaces doing business in Ontario, and directed them to change their order allocation methodologies. The process of will be completed by the end of the first quarter of 2013.