As stock exchange operators roll out trading “speed bumps” to deter high-frequency traders (HFTs), securities regulators are proposing to scrap trade-through protection for orders entered on markets that impose these trading delays.
The Canadian Securities Administrators (CSA) published proposed amendments on Friday that would make clear that orders submitted to marketplaces that impose a systematic order processing delay — a.k.a. “speed bump” — would not be protected under the Order Protection Rule (OPR).
That rule requires that visible, accessible better-priced orders be executed before orders with inferior prices, and that these better-priced orders are not “traded through.” However, as markets have developed systems that impose intentional execution delays, regulators have had to rethink how order protection works in these trading environments.
The CSA announced that this shouldn’t apply: “In our view, where there are order processing delays systematically built into the functionality of a marketplace, it is not reasonable to require marketplace participants to route orders to that marketplace for OPR compliance.”
The CSA added: “The impact of the ‘speed bump’ and the possible delay in execution could negatively impact execution quality and fill rates if liquidity providing orders disappear while the order routed to execute with displayed volume is delayed by the operation of the ‘speed bump.’ We believe it should be the choice of a dealer and/or its clients to determine whether to route orders to such marketplaces.”
As a result, the CSA is proposing revisions to the policy interpretation that accompanies the trading rules. The proposals are out for a 60-day comment period.
At the same time, the Investment Industry Organization of Canada (IIROC) also proposed amendments to the trading rules to conform to the CSA’s policy approach.
IIROC’s proposed amendments would revise the definition of “protected marketplace” to include markets that display orders that are considered protected orders under the OPR and to clarify that the best ask price and best bid price would be determined by reference to orders displayed on a protected marketplace. The deadline for comments on IIROC’s proposals is July 13.
The CSA is also still considering possible reforms to the OPR, which were proposed last year. However, because of the introduction of trading speed bumps in a couple of markets, and their potential impact on those markets, “it is critical to address the implementation of order processing delays and how they intersect with OPR.”
The CSA also reported that the comments received on the proposed OPR reforms last year “have caused us to re-examine all possible options and our approach [to the OPR].”
“It’s important for us to maintain the integrity of the market and instill confidence in investors while providing clarity to all market participants in the wake of recent commercial developments and their potential impact,” said Louis Morisset, chairman of the CSA and president and CEO of the Autorité des marchés financiers. “The proposed amendments help to establish consistency around the application of order protection in capital markets across Canada.”