Market structure initiatives

Advances in trading technology offer investors and market participants increased choices in trading strategies, order types, and marketplaces. In this multi-marketplace environment, the Ontario Securities Commission (OSC) regularly analyzes and monitors changes in market structure and develops rules and policies to address regulatory concerns that may arise.

Some recent market structure initiatives that the OSC has undertaken include:

  • Dark pools and dark orders
  • Order Protection Rule (OPR)
  • Trading Fee Pilot Study
  • Internalization
  • Data fees and access to data

Dark pools and dark orders

Dark pools are marketplaces that do not make orders for securities visible to market participants. Dark orders are orders to trade securities that have limited or no transparency.

On July 29, 2011, the CSA and the Investment Industry Regulatory Organization of Canada (IIROC) published Staff Notice 23-311 - Regulatory Approach to Dark Liquidity in The Canadian Market. This joint notice describes the regulatory framework within which dark liquidity may be used in Canada.

For more information on dark pools, the CSA and IIROC have also jointly published a consultation paper, and position paper.

Order Protection Rule

The Order Protection Rule (OPR) took effect on February 1, 2011 and helps maintain investor confidence and integrity in the Canadian capital market. The OPR protects against trades executing before immediately accessible, visible, better-priced limit orders.

The OPR requires marketplaces to establish, maintain and ensure compliance with written policies and procedures reasonably designed to prevent inferior-priced orders from “trading through”.

The CSA introduced the Order Protection Rule on November 13, 2009 through amendments to National Instrument 21-101 Marketplace Operation (NI 21-101) and related Companion Policy 21-101CP, and National Instrument 23-101 Trading Rules (NI 23-101) and related Companion Policy 23-101CP.

Trading Fee Rebate Pilot Study

The CSA has been considering a pilot study on the payment of trading fee rebates for many years in relation to our continued work to foster fair and efficient capital markets and confidence in capital markets. A pilot study was initially considered as part of amendments to the Order Protection Rule, in response to concerns that the payment of trading fee rebates by marketplaces may be affecting the behaviour of market participants by creating conflicts of interest for dealers and contributing to both increased segmentation of order flow and intermediation. The pilot study but did not progress further at the time, due to certain risks arising from the interconnected nature of North American markets and securities that are interlisted in the United States.

In March of 2018, the United States Securities and Exchange Commission (SEC) proposed new Rule 610T of Regulation National Market System (NMS) that would conduct a transaction fee pilot for NMS securities. Accordingly, the CSA moved forward with a proposal for a Canadian trading fee rebate pilot study that was published in December 2018 and approved in January 2020. The CSA noted that implementation of the trading fee rebate pilot would be conditional on the implementation of the SEC transaction fee pilot.

On June 16, 2020, the United States Court of Appeals for the District of Columbia Circuit vacated Rule 610T and remanded it to the SEC. Accordingly, the CSA’s trading fee rebate pilot study is on hold for an indefinite period. 

Internalization

In March 2019, the CSA and IIROC published Joint Consultation Paper 23-406 seeking industry feedback in response to concerns regarding the internalization of small/retail orders within the Canadian equity market. Internalization generally refers to a trade that has been executed with the same dealer as both the buyer and the seller.

While internalization may benefit individual dealers and their respective clients, concerns have been raised about the impact on the quality of the Canadian market where increasing numbers of orders are being internalized by dealers.

After a review of feedback received in response to the Consultation Paper and a further review of data, the CSA and IIROC published Joint Staff Notice 23-327 that provides an update on the ongoing considerations. While no policy work or changes to the rule framework are being considered in the near-term, the CSA and IIROC will continue to monitor the data on an ongoing basis and if there are any indications that changes to internalization practices are possibly impacting Canadian market quality in a negative way, appropriate responses will be considered at that time.

Data fees and access to data

The OSC has authority over the means of access to marketplace data and the fees charged by marketplaces for that data. 

In connection with concerns raised relating to access to market data, including the fees charged, the CSA conducted a series of consultations (see CSA Staff Consultation Paper 21-401 and the subsequent CSA Notice and Request for Comment that included certain proposals intended to address some of these concerns).

These consultations contributed to the formalization of a Data Fees Methodology (CSA Staff Notice 21-319) used specifically for the oversight of real-time professional market data display fees.    

Data fees and access to data continue to be an area under review.

Notices and reports

Market share threshold

On an annual basis, the OSC publishes the market share threshold and an annual list of the marketplaces that display protected orders (protected marketplaces) and marketplaces whose orders will not be protected (unprotected marketplaces) for the purposes of NI 23-101 and the OPR. The following notices reflect the most recent information: