1. Provision for Marketplace Thresholds

Section 8 of National Instrument 23-103 Electronic Trading and Direct Electronic Access to Marketplaces (“Electronic Trading Rule”) provides that a “marketplace must not permit the execution of orders for exchange-traded securities to exceed the price and volume thresholds” set by the marketplace or, if the marketplace has retained a regulation services provider, its regulation services provider.  Since all marketplaces trading listed securities and quoted securities in Canada have retained IIROC to be their regulation services provider, the thresholds would be established by IIROC.1

1.  Principles Guiding Marketplace Thresholds

IIROC has established three guiding principles to help ensure Marketplace Thresholds effectively control price movement and can be appropriately integrated into a multi-tiered approach for the control of short-term volatility and the prevention of erroneous orders.2

1. Application Prior to Level of Volatility for Regulatory Intervention

The prescribed parameters of Marketplace Thresholds have been chosen to generally preclude the execution of an order that would otherwise trigger regulatory intervention in the form of a Single-Stock Circuit Breaker (“SSCB”)3 or the application of IIROC’s policies and procedures for the variation or cancellation of trades (“Unreasonable Trade Policy”).  The circumstances when a SSCB would be triggered for a security are set out in IIROC Notice 14-0170 – Guidance Respecting the Expansion of Single-Stock Circuit Breakers (July 10, 2014). The Unreasonable Trade Policy sets out the circumstances when IIROC would not intervene and identifies the factors that would be taken into account when IIROC would exercise its discretion to intervene for the cancellation or variation of trades.4

The operation of Marketplace Thresholds has been designed to preclude the execution of an order that exceeds the prescribed parameters and is:

• a single active order received by the marketplace;
• part of a series of orders for a particular security, the preponderance of which have been generated from the same source (e.g. the same “Trader ID”) over a very short period of time; or
• one of a series of stop-loss orders for a particular security that are held by the marketplace for processing which have been triggered at the same time or in succession over a very short period of time.

1. Minimum Impact on Price Discovery and Access to “Tradable” Liquidity

While specific Marketplace Threshold levels are prescribed in this Guidance, the control mechanism that a marketplace may employ to implement the Marketplace Thresholds is not.  IIROC believes that it is beneficial for a marketplace to have flexibility in choosing the control mechanism that best suits its platform and customers; however there are a number of principles that a marketplace’s control mechanism should follow in order to preserve a fair and orderly market.  One such principle is that the control mechanism should have the least amount of impact that is practical on the market-wide operation of the price discovery mechanism and access to “tradable” liquidity.

As well, the control mechanism should not exacerbate price movement during periods of rapid market volatility by:

• preventing access to orders that would otherwise be able to execute at “acceptable” prices; or
• redirecting “unacceptable” orders to other marketplaces or returning the orders to a smart order router for re-entry on another marketplace.

We note that if the control mechanism used to implement the Marketplace Thresholds simply rejects offending orders, that mechanism would not meet the principle of not exacerbating price movement during periods of rapid market volatility.  Amending the functionality to provide a message as to the reason for the rejection however, would meet this principle. 

As well, the execution of offending orders could equally be precluded by executing the order to the limit provided by the Marketplace Thresholds with the balance of the order either re-priced and booked as a limit order at that price or cancelled with a message sent to the originator of the order indicating the reason for the re-price or cancellation.  Upon the Participant or Access Person that entered the order receiving notice that an order or a portion of an order had been re-priced or cancelled, the Participant or Access Person is given the opportunity to review the order to ensure that its re-entry would not interfere with a fair and orderly market and not contravene requirements set under Policy 7.1.

1. Minimum Imposition of Regulatory Burden on Other Entities

The control mechanism adopted by a marketplace should, to the greatest extent possible, not impose a regulatory burden (including the need for technological changes) on other marketplaces or on service providers, regulation services providers, information processors, Participants and Access Persons so that these entities are not unnecessarily burdened by the introduction of a Marketplace Threshold control mechanism.

1. Elements of Marketplace Thresholds

1. Prescribed Marketplace Thresholds

Threshold Levels

Until changed with the issuance of further guidance, the following table sets out the price parameters for Marketplace Thresholds:

A Marketplace Threshold is to be triggered for a particular security when an order is received by a marketplace that, if executed, would exceed the prescribed threshold level. 

In setting specific Marketplace Thresholds, IIROC is not limiting its ability to bring forth enforcement action with respect to trading activity that may have occurred within the prescribed thresholds but is still considered to be in contravention of IIROC rules.  As well, the application of specific Marketplace Thresholds does not impede IIROC’s existing authority under UMIR to vary or cancel trades.

Reference Prices

For the purposes of determining a price increase or decline, a marketplace must compare each order of a security to be traded on the marketplace to two reference prices:

1. the national last sale price6 of that security on that particular trading day (“NLSP”); and
2. the national last sale price of that security that  occurred on the most recent minute interval (“One-Minute Reference Price”).  For example: at 10:00:00 the One-Minute Reference Price would be the value of the NLSP at 10:00:00 and remains constant for one minute until it is updated at the next minute increment at 10:01:00.  Therefore, the value of the One-Minute Reference Price at 10:01:08 is the value of the One-Minute Reference Price that was established at 10:01:00 and does not change, regardless of any orders that are executed, until it is reset at 10:02:00 to the value of the NLSP at 10:02:00.

If an order, on execution, would trade at a price that exceeds the prescribed threshold level measured against either of these reference prices, the marketplace must preclude the execution of the offending order.

To accommodate any future changes to either the threshold levels or the one-minute time interval, we expect marketplaces to ensure that these parameters are configurable in their systems.

Below are a number of examples that highlight the interplay of the NLSP and One-Minute Reference Price bands to create the Marketplace Thresholds that will be used to preclude offending orders from execution.

Example A

Order received at 9:30:50 ($2.16)

Measured against NLSP ($2.15) +/- 30%. NLSP price band is $1.51 - $2.80.

Order price is within the Marketplace Threshold.

Measured against One-Minute Reference Price ($2.10) +/- 30%. One-Minute Reference Price band is $1.47 - $2.73.

Order price is within the Marketplace Threshold.

↓

Order is submitted for execution.

Example B

Order received at 9:32:40 ($1.25)

Measured against NLSP ($2.15) +/- 30%. NLSP price band is $1.50 - $2.80.

Order price is outside the Marketplace Threshold.

↓

The order does not need to be checked against the One-Minute Reference Price as execution is prohibited when measured against the NLSP.

Example C

Order received at 9:32:50 ($2.83)

Measured against NLSP ($2.18) +/- 30%. NLSP price band is $1.53 - $2.83.

Order price is within the Marketplace Threshold.

Measured against One-Minute Reference Price ($2.17) +/- 30%. One-Minute Reference Price band is $1.52 - $2.82.

↓

Order price is outside the Marketplace Threshold and order execution is prohibited.

 Price Category Determination

The price category of a security will be based on the last NLSP of that particular security on the immediately preceding trading day on the exchange on which the security is listed. For a newly listed security, we expect the listing exchange to send a notice by the evening prior to the first trading day of the security to all other marketplaces indicating the initial price category for that security.  We expect this process to be similar to current practice for determining the price at which a newly listed security will trade for the purposes of calculating a “standard trading unit” for that security.

Hours of Operation

Marketplace Thresholds are to operate at the prescribed levels during the core trading hours of 9:30 a.m. to 4:00 p.m. ET.

First Trade Exempt from Thresholds

The first trade of each trading day in a particular security in Canada will set the initial NLSP but will not be subject to Marketplace Thresholds.  Similarly, the first trade in a particular security in Canada after the lifting of a regulatory trading halt will not be subject to Marketplace Thresholds.  Given race conditions and certain timing issues, it may be difficult at times for a marketplace to identify the first trade of a trading day in a particular security.  However, if a marketplace makes reasonable efforts to identify the first trade of a trading day in a particular security on a marketplace, it is IIROC’s view that this would be sufficient to meet this aspect of the Guidance.

Threshold Override

There may be instances when it is appropriate for an order to be executed outside of the prescribed Marketplace Thresholds.  To address this situation, it is expected that marketplaces build their control mechanisms with the ability to override the system such that an order that would otherwise be prevented from trading could be permitted to execute.  This feature is to be used by a marketplace only upon instruction or prior consent from a Market Integrity Official in order to maintain fair and orderly markets.

1. No Requirement for Volume Controls

Because of the specific obligations imposed on Participants and Access Persons to have automated controls prior to order entry7 and the difficulty to accurately determine an order volume that would be appropriate for a particular Participant or Access Person, IIROC does not believe at this time that a volume control by itself should form part of the Marketplace Threshold regime.  Nonetheless, under NI 23-103 a marketplace is required to regularly assess whether it requires any risk management and supervisory controls, policies and procedures relating to electronic trading8 and in so doing may introduce volume controls.

1. Application to All Marketplaces

Each marketplace in Canada that has retained IIROC as its regulation services provider must adopt Marketplace Thresholds.  Since it is possible on all marketplaces for dark orders to execute at prices outside of the Marketplace Threshold parameters if the national best bid and offer are wide enough, it is important that Marketplace Thresholds are implemented on all marketplaces, including dark marketplaces, so that short-term volatility and erroneous orders are effectively addressed.

1. Orders Subject to Marketplace Thresholds

Marketplace Thresholds apply to all orders except for the following: a Basis Order, a Closing Price Order, a Special Terms Order, and a Volume-Weighted Average Price Order.9 These order types do not set last sale price, therefore we believe that these orders do not need to be subject to Marketplace Thresholds. 

In addition, Marketplace Thresholds do not apply to Opening Orders, Market-on-Close orders or orders that participate in a post-halt auction.  We have excluded Opening Orders to prevent the unnecessary triggering of a Marketplace Threshold in the instance where the execution of an Opening Order in a security may be delayed, and the price of an Opening Order may be materially different from a trade in that security that took place earlier that trading day.  Not applying Marketplace Thresholds to Opening Orders, Market-on-Close Orders and orders that participate in a post-halt auction will ensure that they may be executed at their calculated prices.  We note however, that the price of an Opening Order, Market-on-Close Order or order participating in a post-halt auction can be used to set the NLSP for the purposes of Marketplace Threshold calculations.

1. Application of Marketplace Thresholds to Directed-Action Orders

DAOs are subject to Marketplace Thresholds.10  While a DAO is an instruction to the receiving marketplace to immediately execute the order without reference to the prices of orders on other marketplaces, Marketplace Thresholds will prevent the execution of a DAO that exceeds the prescribed price parameters.

1. Transparency of Marketplace Threshold Functionality

IIROC expects that each marketplace will publicly disclose, at least on the website of the marketplace, a detailed description of the functionality of the control mechanism(s) it uses to implement the Marketplace Thresholds.  The description should provide specific examples of how an order that triggers a Marketplace Threshold will be handled by the marketplace.

Transparency of Marketplace Threshold functionality provides certainty to Participants and Access Persons as to how an order that exceeds Marketplace Thresholds will be treated by a marketplace.

1. Other Marketplace Controls

We note that the above thresholds are the minimum price levels whereby a marketplace must preclude the execution of an order for a listed or quoted security.  However, a marketplace is not prohibited from implementing tighter price levels and introducing other controls to address the risks of electronic trading that take place on its platform or to provide an additional customer service offering.  We would expect that this type of functionality would be submitted for review by statutory regulators prior to operation and would be publicly and clearly disclosed on the website of the marketplace.

• 1If IIROC ceases to be the regulation services provider for any marketplace trading listed or quoted securities, subsection 8(2) of the Electronic Trading Rule would require IIROC to coordinate the thresholds with the other regulation services providers and any Exchanges or QTRSs that perform their own market integrity regulation.
• 2See Section 2.1 – Controlling Unexplained Price Volatility in IIROC Notice 14-0089 –  Request for Comments – Proposed Guidance on Marketplace Thresholds (April 3, 2014).
• 3For details on the current operation of Single-Stock Circuit Breakers, see IIROC Notice 14-0170 – Guidance Note  –  Guidance Respecting the Extension of Single-Stock Circuit Breakers (July 10, 2014).
• 4The Unreasonable Trade Policy is set out in IIROC Notice 12-0258 – Guidance Note –  Guidance on Regulatory Intervention for the Variation or Cancellation of Trades (August 20, 2012).
• 5See Single Stock Circuit Breakers for a daily list of securities that are subject to SSCBs.
• 6 UMIR defines “last sale price” as the price of 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:
  (a) a Basis Order;
  (b) a Call Market Order;
  (c) a Closing Price Order;
  (d) a Special Terms Order unless the Special Terms Order has executed with an order or orders other than a Special Terms Order; or
  (e)   a Volume-Weighted Average Price Order.
• 7UMIR Policy 7.1, Part 7
• 8Subsection 7(1)  of NI 23-103
• 9Reference should be made to Rule 1.1 of UMIR for the definitions of these order types.
• 10Under National Instrument 23-103 Trading Rules, a “directed-action order” means a limit order for the purchase or sale of an exchange-traded security, other than an option, that,
  when entered on or routed to a marketplace is to be immediately
  executed against a protect order with any remained to be booked or cancelled; or
  placed in an order book;
  is marked as a directed-action order; and
  is entered or routed at the same time as one or more additional limit orders that are entered on or routed to one or more marketplaces, as necessary, to execute against any protected order with a better price than the order referred to in paragraph (a).