The Canadian Securities Administrators (CSA), a national body of regional regulators, has put forward a proposal that would effectively put a stop to internalisation in the country.
The proposed reclassification of all broker internalisation mechanisms as ”marketplaces', is contained within a CSA notice of proposed amendments to two regulations: national instruments 21-101 market place operation and national instruments 23-101 trading rules. The proposed changes will also amend the reporting and transparency requirements of marketplaces and clarify of the definition of a marketplace.
The reclassification would mean internal crossing networks are covered by the rules on alternative trading systems (ATSs). This would oblige market operators to provide ”free and fair' access to their trading venues, removing the ability of firms to operate discretion over flow, effectively ending the internalisation mechanism's existence as a separate means of trading from exchanges and ATSs.
“That really puts a damper on internalisation,” said Alison Crosthwait, director of global research at agency broker Instinet. “If it passes, it essentially makes internalisation impossible.”
The proposals are in line with recent regulatory moves in Canada, where ATS operator Alpha Group was forced to abandon the internalisation element of its new ”Interspread' dark pool, which is due to launch later this year. The decision was driven in part by the result of a consultation exercise, which produced a strong objection to internalisation. Alpha Group later announced that its internalisation technology would be sold as a separate package, Ucross, to brokers.
“There is a particular resistance to internalisation in Canada, because of the fair access rules, which are a basic principle of the markets here,” said Crosthwait. “People are opposed to anything that threatens that.”
Nevertheless, Crosthwait expects brokers to challenge the proposed reforms. “Commissions are getting squeezed at the moment – it's hard to make money in the brokerage side, so everyone wants to internalise,” she said. “I am surprised that there has not been more opposition to this from the banks already.” Instinet is one of a number of brokers that have applied to Canadian regulators to launch a non-displayed ATS.
The proposed amendments were posted on 20 March. The public comment period closes on 16 June, after which the CSA will consider the feedback and issue further proposals later this year.