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April 1, 2011

Canada Curbs Dark Pool Trading

By John D'Antona Jr.

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  • Canada Curbs Dark Pool Trading
  • Page 2

Canadian regulators have peered across the border and don't like what they see. Canada's three main regulators- Canadian Securities Administrators-CSA-the Ontario Securities Regulator-OSC-and the Investment Industry Regulatory Organization of Canada-IIROC-are on the verge of jointly proposing updates to existing rules that would effectively nip in the bud U.S.-style dark pool trading. Behind the thinking is a long history of transparency in a marketplace which requires all trades to be taken to an exchange or otherwise "lit" market for a print. 

Renee Colyer

"In examining the issues and the risks of the expansion of the use of dark orders, we are of the view that the need for providing some limits on their use is critical in maintaining the quality of the price discovery mechanism and addressing concerns regarding the impact of dark orders on the quality of the Canadian capital market," the regulators wrote in a joint summary.

In particular, these regulators are contemplating the imposition of a minimum trade size clause that would bar the placing of any order under 5000 shares in a dark pool. Orders smaller would automatically be routed to the exchanges.

The minimum size is a clarification of Rule NI 21-101 sections 7.1 (1) & (2) which state that a marketplace that displays orders of exchange-traded securities to a person or company shall provide accurate and timely information regarding orders for the exchange-traded securities displayed on the marketplace to an information processor as required by the information processor or, if there is no information processor, to an information vendor that meets the standards set by a regulation services provider.

Market sources said 5000 shares is the expected minimum size allotment, but nothing has been announced publicly by Canadian regulators. Currently, small orders may be crossed inside a brokerage house but must be taken to the public markets for the print.

The clarification to the rule is expected to pass, according to Alison Crosthwait, director of research at Instinet in Canada, despite mixed opinions on the matter. She said regulators value a transparent market above all else and a minimum size requirement is consistent with that thinking. Any revision would go into effect sometime in the second half of the year.

A minimum order size rule could stymie growth in the nascent dark pool space, especially for U.S.- based brokers that want to set up shop in Canada.

Such is the case for Credit Suisse, which has been considering launching a Canadian dark pool, according to Dmitri Galinov, head of liquidity strategy for the Advanced Execution Services group, operator of the Crossfinder dark pool.

"We have not finalized anything," Galinov said. "We will continue to monitor the regulatory landscape in Canada and revisit the idea of proceeding with a dark pool there after the final rule publishes from regulators and Credit Suisse has an opportunity to view it."