This Rules Notice provides guidance on specific questions regarding compliance with the “best price” obligations of the Universal Market Integrity Rules (“UMIR”) in an environment of multiple protected marketplaces. This guidance:
- reflects the approval of amendments to UMIR regarding the “best price” obligation that were effective as of May 16, 2008;1 and
- supplements and reaffirms the guidance provided in Market Integrity Notice 2008-010 – Guidance – Complying with “Best Price” Obligations (May 16, 2008).2
Reference should also be made to IIROC Notice 09-0105 - Rules Notice – Guidance – UMIR – Guidance on Aspects of “Locked” and “Crossed” Markets (April 9, 2009), which provides guidance on specific questions regarding the “best price” and “best execution” obligations of a Participant under UMIR as they relate to “locked” and “crossed” markets.
Current “Best Price” Provisions
Under the “best price” obligation of Rule 5.2, a Participant is required to make “reasonable efforts” to fill better-priced orders displayed on a “protected marketplace”3 at the time the Participant executes at an inferior price on another marketplace or foreign organized regulated market. A Participant’s “best price” obligation is owed to the “visible” portion of a “better-priced” order on a protected marketplace. If a marketplace permits the entry of an “iceberg” order for which only a portion of the volume is disclosed, no “best price” obligation is owed to the portion of the order that is not visible at the time the Participant is determining its obligation under Rule 5.2.
The policies under Rule 5.2 provide that a Participant will be considered to have made “reasonable efforts” to comply with the “best price” obligation if the Participant has:
- entered the order on a marketplace that will ensure compliance with the “best price” obligation;
- used an acceptable order router; or
- provided the order to another Participant for entry on a marketplace.
If a Participant uses another means to enter an order on a marketplace, a number of factors will be taken into account in determining whether a Participant has made “reasonable efforts” to obtain the best available prices on a marketplace. Among the specific factors is whether:
- the protected marketplace recently launched operations;
- order information from the protected marketplace is available through a data vendor used by the Participant;
- the protected marketplace recently had a material malfunction or interruption of services; and
- the protected marketplace demonstrated an inordinate proportion of “inferior fills” with respect to tradeable orders routed to it.
Each Participant must adopt policies and procedures to ensure compliance with its “best price” obligation, which will include the relevant factors upon which it is relying on in making trading decisions. Each Participant must review its policies and procedures on an ongoing basis to reflect changes to the trading environment and market structure.
Questions and Answers
The following are some of the most frequently asked questions regarding the “best price” obligation of a Participant and the response of IIROC to each question:
- What is a Participant expected to do with an “on-stop” order entered on a marketplace that, once triggered, trades through a better-priced order on another marketplace?
An “on-stop” order entered by a Participant on a marketplace can only be “triggered” once the security that is the subject of the “on-stop” order trades at a specified price on a marketplace. One way for an “on-stop” to be triggered and immediately trade-through another marketplace is if the trade that triggered the “on-stop” was itself a trade-through (others include rapidly moving quotations, commonly know as “flickering quotes”, and instances of a marketplace experiencing technical difficulties). Insofar as reasonable efforts were made to execute a trade at the best available price, IIROC would not consider the resulting trade to be a contravention of the “best price” obligation.
Historically, marketplaces that operated an “on-stop” facility provided that an “on-stop” order, once triggered, would convert to a “limit” order at the trigger price. This handling ensures compliance with the “best price” obligation. A marketplace might employ an allocation methodology that provides the option of having a triggered “on-stop” order converted to a “market” order. One of the implications of this allocation methodology is that once the “on- stop” is triggered, the “market” order will trade exclusively with orders on that marketplace and would not take account of better-priced visible orders on other protected marketplaces. In light of this risk, IIROC expects that a Participant will have a clear understanding of the manner in which “on-stop” orders are handled on a particular marketplace and that the Participant will take appropriate steps to fulfill any “best price” obligations resulting from the use of an “on- stop” facility.
- Does the “best price” obligation preclude the use of “All-or-None” Orders?
No. The execution of an “All-or-None” Order is not exempt from the “best price” obligation, but this does not preclude a Participant or a marketplace from handling an “All-or-None” Order. An “All-or-None” Order is a Special Terms Orders for the purposes of UMIR. If a marketplace supports “All-or-None” Orders, the functionality of the marketplace may provide that the “All-or-None” Order will migrate from the Terms Book if there is the sufficient volume on that marketplace at an appropriate price to completely fill the “All-or-None” Order. In this case, IIROC expects that the Participant will take appropriate steps to fulfill any “best price” obligations if the “All-or-None” Order has executed at an inferior price to better-priced orders on a protected marketplace. On the other hand, the marketplace may only execute the “All-or- None” Order if the volume on that marketplace is sufficient and there are no “better-priced” orders on other protected marketplaces.
If marketplaces do not offer the functionality to handle “All-or-None” Orders, a Participant would still be able to accept orders with such conditions and to handle the orders manually through a trader or through an order management system that would enter the order as a “fill or kill” order on a particular marketplace only when that marketplace had sufficient displayed volume to execute the order without avoiding “better-priced” orders on other protected marketplaces. The Participant will have to decide whether to accept “All-or-None” Orders in these circumstances.
- In the case of a “bid-through” or “offer-through” which order is the “active” order?
With the amendments to the “best price” obligation that became effective May 16, 2008, the relevant time to determine compliance with the “best price” obligation was changed from the time of order entry to the time of order execution. As a result of this change, the concept of “active” and “passive” orders is no longer relevant to the determining compliance with the “best price” obligation.
- Is a Participant required to consider organized regulated markets outside of Canada as part of its “best price” obligation?
No. The “best price” obligation applies to orders entered on a marketplace. Under UMIR, a “marketplace” includes an exchange, quotation and trade reporting system or alternative trading system that operates in Canada.
However, a Participant handling a client order may have an obligation to consider orders on a foreign organized regulated market as part of its “best execution” obligation. If a foreign market is considered in order to provide a client with “best execution”, the Participant would have an obligation to better-priced orders on protected marketplaces in Canada under the “best price” obligation.
- 1See IIROC Notice 09-107 - Rules Notice – Notice of Approval – UMIR – Provisions Respecting the “Best Price” Obligation (April 17, 2009) which sets out the approval of the applicable securities regulatory authorities of various amendments to UMIR that were effective on May 16, 2008 on the publication of Market Integrity Notice 2008-009 – Request for Comments – Provisions Respecting the “Best Price” Obligation (May 16, 2008).
- 2Market Integrity Notice 2008-010 repealed and replaced, effective May 18, 2008, the guidance related to Rule 5.2 from the following notices:
- Market Integrity Notice 2007-021 – Guidance – Expectations Regarding “Best Price” Obligations (October 24, 2007);
- Market Integrity Notice 2007-015 – Guidance – Specific Questions Related to Trading on Multiple Marketplaces (August 10, 2007);
- Market Integrity Notice 2006-020 – Guidance – Compliance Requirements for Trading on Multiple Marketplaces (October 30, 2006); and
- Market Integrity Notice 2006-017 – Guidance – Securities Trading on Multiple Marketplaces (September 1, 2006).
- 3UMIR defines a “protected marketplace” as a marketplace that:
- disseminates order data in real-time and electronically through one or more information vendors in accordance with the Marketplace Operation Instrument;
- permits dealers to have access to trading in the capacity as agent;
- provides fully-automated electronic order entry; and
- provides fully-automated order matching and trade execution