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June 1, 2012

Mixed Reviews for Canadian 'Trade At'

By John D'Antona Jr.

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Canadian regulators have passed new rules governing dark pools in Canada, eliciting mixed responses from market participants, with no discernible consensus from either the buyside or sellside, or from the dark pools themselves.

Michael Thom

The main goal of the rules, according to regulators, is similar to the U.S. concept of a "trade-at" rule. If a trade is to be executed in the dark, it must offer meaningful price improvement over the displayed market's price.

In the U.S., the idea of requiring internalizers such as wholesalers and dark pool operators to pay more for orders than they already do has been kicking around for a couple of years. The debate - has centered on how much a broker or wholesaler would have to price-improve an order to internalize it or be forced to send it to a public exchange. U.S. wholesalers, broker-dealers that execute retail orders, are vehemently opposed to trade-at.

Under the new Canadian rule, besides providing meaningful price improvement, regulators laid the groundwork for a minimum trade size for off-board trades. Both the price-improvement rules and the minimum-trade-size amendment are supposed to keep trading focused in the lit market, which is historically important to Canadians, as well as to promote fairness between smaller retail and larger institutional order flow.

One buysider was OK with the new amendments. Michael Thom, head trader at Vancouver-based Genus Capital Management, said regulators are on the right track in defining meaningful price improvement and in considering a minimum trade size for dark orders. This type of approach, implementing some rules and publicly stating they are only laying the groundwork for others, is beneficial for the market, he added.

"I think they (regulators) struck a balance here," Thom said. "These rules are not going to negatively impact me and will continue to let me trade in the dark where I want to. Did they institute exactly what I wanted? No. But they struck a good balance and are letting the market adjust and then come back and see what the rules' effects are. Incremental change is good."

Liquidnet, which operates a dark pool in Canada, is also accepting of the rules. Robert Young, president of Liquidnet Canada, said the rules preserve the appropriate protections for institutions seeking to execute large block orders in dark venues.

See Chart: Canadian Trading Volume

"The regulators want to constrain U.S.-style internalization in dark pools, thereby avoiding greater fragmentation of the Canadian markets," Young said. "These rules do so while allowing institutions to trade in size without constraint." 

And one broker-dealer was upbeat on the rules as well, despite not knowing all the details on just what the minimum-trade-size requirement would be set at.