Dark Order Price Improvement Obligations When Trading Against an Odd-Lot Order

15-0168
Type: Rules Notice> Approval/Implementation
Rule connection:
UMIR
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Contact:

Kevin McCoy
Acting Vice-President, Market Regulation Policy
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Executive Summary

On July 30, 2015 the applicable regulatory authorities approved amendments to UMIR that clarify a Dark Order’s1  obligations respecting the requirement to provide a “better price”2  when executing against orders for less than one standard tading unit3  “odd-lot order”) (“Amendments”).

The Amendments confirm that the provision of price improvement by a Dark Order is not required if the order that it executes against is an odd-lot order. The Amendments help ensure  that requirements respecting the execution of odd-lot orders are applied in a consistent manner on all marketplaces that support the execution of odd-lot orders.  The text of the Amendments is set out in Appendix “A” and a summary of comments received along with IIROC’s responses is included as Appendix “B”.

IIROC does  not expect the Amendments to cause any technological impact on Participants, Access Persons, Marketplaces or other stakeholders.

The Amndments are effective immediately.

  • 1The UMIR definition of Dark Order is set out on page 4 of this notice.
  • 2Better price is defined in UMIR to mean, in respect of each trade resulting from an order for a particular security:
    (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 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.
  • 3“standard trading unit” means, in respect of:
    (a) a derivative instrument, 1 contract;
    (b) a debt security that is a listed or quoted security, $1,000 in principal amount; or
    (c) any equity or similar security: (i). 1,000 units or a security trading at less than $0.10 per unit, (ii). 500 units of a security trading at $0.10 or more per unit and less than $1.00 per unit, and (iii). 100 units of a security trading at $1.00 or more per unit.
Table of contents
  1. Discussion of Amendments

  1. Summary of Amendments

The Amendments help ensure that requirements respecting the execution of odd-lot orders are applied in a consistent manner on all marketplaces that support the execution of odd-lot orders. The Amendments confirm the pricing obligations of passive liquidity not displayed in the consolidated market display when trading against an odd-lot order. The Amendments are comprised of amendments to UMIR 6.6(2) that clarify that an odd-lot order is not required to receive a better price when trading against a Dark Order.
 

  1. Dark Order Requirements to Execute at a Better Price When Trading Against an Odd-Lot Order

A Dark Order is defined in UMIR as:

  1. an order no portion of which is displayed on entry on a marketplace in a consolidated market display; or
  2. that portion of an order which on entry to a marketplace is not displayed in a consolidated market display if that portion may trade at a price other than the price displayed by that portion of the order included in the consolidated market display but does not include an order entered on a marketplace as:
  3. part of an intentional cross;
  4. a market order that is immediately executed in full on one or more marketplaces at the time of entry;
  5. a limit order that is immediately executed in full on one or more marketplaces at the time of entry;
  6. a Basis Order;
  7. a Call Market Order if that Call Market Order may only trade with other Call Market Orders and the matching of Call Market Orders occurs less frequently than once every minute;
  8. a Closing Price Order;
  9. a Market-on-Close Order;
  10. an Opening Order; or
  11. a Volume-Weighted Average Price Order.

Pursuant to this definition any resting order eligible to execute exclusively against odd-lot orders would be considered a Dark Order if no portion is displayed on entry on a marketplace in a consolidated market display.  

UMIR 6.6(1) requires that an order for less than 50 standard trading units and with a value of $100,000.00 or less entered on a marketplace that executes against a Dark Order is executed at a “better price”. UMIR 6.6(2) provides a list of order types that Dark Orders can execute against without providing a “better price”.  These order types include an order that is:

  • a Basis Order;
  • a Call Market Order;
  • a Closing Price Order;
  • a Market-on-Close Order
  • an Opening Order; or
  • a Volume-Weighted Average Price Order.

Odd-lot orders are not included in this list. Accordingly, under a technical application of this requirement an odd-lot order, which by its nature is less than 50 standard trading units, that executes against a Dark Order must be executed at a “better price”.  The Amendments add “an order for less than one standard trading unit” to this list of order types that Dark Orders can execute against without providing a “better price”.

  1. Analysis

  1. Benefits of Liquidity Provision to Facilitate Odd-Lot Order Execution

The consolidated market display includes standard trading units only and excludes odd-lot orders or the odd-lot portion of a mixed-lot order. Only orders representing full standard trading units are able to interact with the liquidity displayed on the consolidated market display. Odd-lot orders (or the odd-lot portion or a mixed-lot order) being less than one standard trading unit,  cannot trade against the liquidity displayed in the consolidated market display.

Currently, marketplaces are designed such that odd-lot orders or odd-lot portions of mixed-lot orders may only trade on facilities specifically designed to provide odd-lot execution.4 Given that odd-lot orders are unable to trade against displayed liquidity, the provision of odd-lot liquidity on such facilities, whether through a market-maker obligation or otherwise, is critical to ensure that odd-lots are able to execute. Without such liquidity provision, the execution of an odd-lot order would be difficult. IIROC believes that a requirement to provide a “better price” when executing against an active odd-lot order is not balanced with the contribution that passive liquidity facilitating the execution of odd-lot orders brings to investors. 

  1. Consolidated Market Display

National Instrument 21-101 Marketplace Operation (“NI 21-101”) requires that a marketplace that displays orders of exchange-traded securities to a person or company provide accurate and timely information regarding orders for the exchange-traded securities displayed by the marketplace to an information processor (“IP”). Part 5.1 (3) of Companion Policy 21-101 (“CP 21-101”) clarifies that the CSA do not consider special terms orders that are not immediately executable or that trade in special terms books to be orders that must be provided to an IP. While “special terms order” is not defined in NI 21-101, the UMIR definition of special terms order includes an order for the purchase or sale of a security for less than one standard trading unit.

In UMIR, “consolidated market display” is defined as information on orders or trades from each marketplace on which a particular security trades that has been processed by an IP in accordance with Part 14 of NI 21-101. The IP only processes orders and trades provided by the marketplace in accordance with Part 7 or 8 of NI 21-101. As noted above, “special terms orders” are not required to be provided to the IP for processing.

In practice, odd-lot orders are not processed by the IP and do not contribute to the consolidated market display.

  1. Treatment of Odd-Lot Orders in other UMIR Provisions

“Disclosed Volume”

In UMIR, “disclosed volume” means the aggregate of the number of units of a security relating to each order for that security entered on a protected marketplace and displayed in a consolidated market display. This definition excludes, among other order types, the volume of Special Terms Orders (which include odd-lot orders).

“Best Ask Price” and “Best Bid Price”

The UMIR definitions of both “best ask price” and “best bid price” consider the highest/lowest prices displayed in a consolidated market display, but specifically exclude, among other types of orders, Special Terms Orders (which include odd-lot orders).

“Last Sale Price”

The UMIR definition of “last sale price” means the last sale of at least one standard trading unit of a particular security displayed in a consolidated market display but does not include the price of a sale resulting from an order that is, among other things, a Special Terms Order (which includes an odd-lot order) unless the Special Terms Order has executed with an order or orders other than a Special Terms Order.

Trade Cancellation and Variation

IIROC confirmed in the 2013 annual compliance report that IIROC would no longer intervene in the execution of certain odd-lot orders at unreasonable prices.5

“Odd lot executions do not impact the last sale price, volume-weighted average price (VWAP), closing price or other common benchmarks and market integrity is not impaired by the existence of unreasonable or erroneous odd lot trades.”

  1. Treatment of Odd-Lot Orders in the United States

Rule 610 and Rule 611of Regulation NMS

Rule 610 of Regulation NMS (“Reg NMS”) provides the framework for the fair access to quotations of NMS securities by all national securities exchanges and national securities associations. Rule 611 of Reg NMS requires that all trading centers establish, maintain and enforce written policies and procedures that are reasonably designed to prevent trade-throughs of protected quotations in NMS stocks. The U.S Securities and Exchange Commission (“SEC”) previously issued guidance clarifying that the provision of Reg NMS Rule 610 (Access to quotations) and Reg NMS Rule 611 (Order Protection Rule) do not apply to odd-lot orders.  The SEC noted in its guidance6  that:

“Rule 610 and Rule 611 do not apply to odd-lot orders or to the odd-lot portions of mixed-lot orders. Rule 600(b)(8) defines “bid” or “offer” as the bid price or offer price for one or more round lots of an NMS security. This definition is embedded in the definition of “quotation” in Rule 600(b)(62), as well as the definition of “protected bid” or “protected offer” in Rule 600(b)(57). Consequently, trading centers are permitted to establish their own rules for handling odd-lot orders and the odd-lot portions of mixed-lot orders. For example, although trading centers are not required to handle odd-lot orders or the odd-lot portions of mixed-lot orders in accordance with the requirements for automated quotations set forth in Rule 600(b)(3), they are free to incorporate such requirements in their rules if they wish to do so.”

Pursuant to Reg NMS the execution of an odd-lot order may trade through the protected quote resulting in an execution at a worse price than the displayed quote. Markets in the United States that accept odd-lot orders have adopted their own procedures for the handling of odd-lot orders which generally provide for the execution of odd-lot orders at the quote.

New York Stock Exchange (“NYSE”)

On July 27, 2010, the SEC approved rule amendments respecting the handling of odd-lot orders on the NYSE.  When sufficient odd-lot interest is received that can be aggregated to round lots7 , the round lots are posted to the exchange and are included in the protected quote.  The designated market maker is no longer the counterparty to odd-lot trades, and only has obligations for unmatched odd-lot interest at the opening, the re-opening following a halt and at the close. There is no requirement that the odd-lot executions occur at a price better than the protected quote. Odd-lot orders that cannot be aggregated to round lots are booked on the exchange at their limit prices and are not displayed in the exchange quote.

  1. Impacts of the Amendments

  1. Participant Impacts

IIROC does not believe that the Amendments will impact Participants.

  1. Marketplace Impacts

IIROC does not believe that the Amendments will impact marketplaces, as the Amendments support all current odd-lot execution facilities.

  1. Implementation Plan

These Amendments are effective immediately.

Appendix A – UMIR Amendments

Appendix B – Comments Received in Response to Rules Notice 15-0045

  • 4For a summary of current odd-lot facilities, please see Rules Notice 15-0045 – Rules Notice – Request for Comments – UMIR - Dark Order Price Improvement Obligations When Trading Against an Odd-Lot Order (February 12, 2015)
  • 5The discontinuing of intervention respecting odd-lot trades at unreasonable or erroneous prices was also set out in IIROC Notice 13-0297 – Rules Notice – Technical - Variation and Cancellation of Odd Lot Trades (December 10, 2013).
  • 6See question 7.03 of “Frequently Asked Questions Concerning Rule 611 and Rule 610 of Regulation NMS
  • 7On the NYSE round lots are a group of 100 shares of a stock, or any group of shares that can be evenly divided by 100.