Canadian financial watchdogs have set out a new regulatory framework for dark trading, giving execution priority to lit orders, requiring meaningful price improvement and giving themselves the power to impose a minimum size for dark orders. The changes take effect in October.
The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organisation of Canada (IIROC) collaborated on the new rules which aim to improve price discovery in Canadian equity markets.
Under the amended Marketplace Operation and Universal Market Integrity Rules (UMIR), visible orders will have execution priority over dark orders on the same marketplace at the same price.
To trade with a dark order, smaller orders must receive a minimum level of price improvement, which is defined as one trading increment or half a trading increment for securities with a bid-ask spread of one trading increment.
IIROC chose not to designate a minimum size for dark orders for now, but with the CSA has pledged to monitor market developments closely to consider if and when IIROC should implement a minimum size. The imposition of minimum order sizes has been strongly opposed by market participants, on grounds it would limit the options available to professional traders entering or exiting a large position.
Dark trading in Canada reached US$12.99 billion in March, the highest total ever recorded and over double the amount recorded in the same period last year, according to figures provided by Thomson Reuters.
“The new rule framework recognises the increasing use of dark liquidity and balances displayed and dark liquidity for healthy price discovery,” said Susan Wolburgh Jenah, IIROC president and CEO. “These proposals are intended to ensure Canadian equity markets continue to evolve in a fair and competitive manner that strengthens market integrity and investor protection.”
The CSA, the council of the securities regulator authorities of Canada’s provinces and territories, coordinates and harmonises regulation for the Canadian capital markets. IIROC is the national self-regulatory organisation which oversees all investment dealers and trading activity on debt and equity marketplaces in Canada.