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Dave Webb sent me the PDF of this report,

Cheers, Baires

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Joint CSA/IIROC - Position Paper 23-405 - Dark Liquidity in the Canadian Market

JOINT CANADIAN SECURITIES ADMINISTRATORS/INVESTMENT

INDUSTRY REGULATORY ORGANIZATION OF CANADA

POSITION PAPER 23-405

DARK LIQUIDITY IN THE CANADIAN MARKET

I. INTRODUCTION

Developments in the Canadian capital markets have been both significant and rapid in

recent years. Technological advancements have increased the speed and complexity of

trading, innovation has introduced choice as to how and where to trade, and regulatory

requirements have necessitated a greater awareness of execution opportunities and the

prices at which they are available.

As marketplaces look to expand the order types and features that they offer, and as

market participants seek guidance on market structure policies, staff of the Canadian

Securities Administrators (CSA staff) and staff of the Investment Industry Regulatory

Organization of Canada (IIROC staff and, together with CSA staff, we) have undertaken

a review of many of the issues which we believe need to be addressed immediately.

These include issues relating to dark pools, electronic trading, and the regulation of

marketplaces. Once our review is completed, we will seek feedback from the industry by

publishing a number of different regulatory proposals or changes over subsequent

months.

This position paper (Position Paper) specifically deals with issues associated with Dark

Pools and Dark Orders.

1

The views expressed take into account the consultations

conducted by the CSA and IIROC since the end of 2009.

2

For the purposes of this Position Paper, a Dark Order is defined as any order on any

marketplace that is entered with no pre-trade transparency and not required to be reported

to an information processor

3

or data vendor under the applicable rules. In this Position

Paper, Dark Orders do not include reserve or iceberg orders, as a portion of these orders

is always displayed, and contributes to the pre-trade price discovery process. Dark Orders

can be entered on either a transparent marketplace or in a Dark Pool. A Dark Pool is a

specific marketplace that offers no pre-trade transparency on any orders, and may be

structured in a variety of ways including as a call market, continuous auction market, a

1

Note that for purposes of this paper, our definition of Dark Order is different than was used in previous

publications. See glossary for all definitions.

2

For more details regarding the consultations, see the discussion in the next section regarding the

Consultation Paper and the Forum.

3

Currently, the information processor for exchange-traded securities other than options is operated by the

Toronto Stock Exchange. The information processor collects order and trade information from all

marketplaces and disseminates consolidated information.

2

hybrid of both continuous and call matching, or a negotiation system. Current practices

allow Dark Orders to be entered with a price:

•

determined by the marketplace participant4 entering the order;

•

that could trigger a negotiation process; or

•

that will be determined by reference to another publicly available price and not

directly determined by the counterparties to the trade. The reference price could

be a price linked to another non-discretionary price such as the national best bid

or best offer (NBBO)

5

or the volume weighted average price (VWAP).

(a) Background and Objectives of this Position Paper

The publication of this Position Paper is the next step in a process that we began in late

2009. In Joint CSA/IIROC Consultation Paper 23-404

Dark Pools, Dark Orders, and

Other Developments in Market Structure in Canada

6

(Consultation Paper), we identified

and sought comment on a number of issues, particularly the general impact of Dark

Pools, the introduction of Dark Order types, and the introduction of smart order routers.

The Consultation Paper discussed these issues and their potential impact on the Canadian

markets, including their impact on market liquidity, transparency, price discovery,

fairness and integrity.

7

These factors, when taken together, are used to assess the quality

of the market.

We received 23 response letters to the Consultation Paper from a range of respondents

including marketplaces, buy-side and sell-side representatives, and industry associations.

On March 23, 2010, the CSA and IIROC hosted a forum (the Forum) to discuss the issues

raised in the Consultation Paper and in the response letters. The themes discussed at the

Forum included:

•

whether Dark Pools should be required to provide price improvement and if so,

what is meaningful price improvement;

•

the use of market pegged orders and whether those orders “free-ride” off the

visible market;

•

the use of sub-penny pricing;

•

broker preferencing at the marketplace level and dealer internalization of order

flow;

•

the use of Indications of Interest (IOIs) by Dark Pools to attract order flow; and

•

the fairness of a marketplace offering smart order router services that use

marketplace data that is not available to other marketplace participants.

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