The Canadian Securities Administrators, which represents Canada’s provincial securities regulators, is awaiting comment from industry players on a pair of rule changes designed to ensure investors get the best possible price when making a trade.

The proposals would require that each marketplace establish, maintain and enforce written policies and procedures that are designed to prevent trade-throughs, which occur when better-priced orders are bypassed in favour of ones with inferior prices.

“Trade-through protection is important to maintain investor confidence in the fairness and efficiency of our market,” says Jean St-Gelais, chairman of the CSA and president and CEO of the Autorité des marchés financiers, Quebec’s financial services regulator, in Montreal.

Trade-through protection, which is currently addressed as part of the best-price obligation imposed by the Investment Industry Regulatory Organization of Canada ensures that all immediately accessible, visible, better-priced orders are executed before inferior-priced limit orders.

Throughout the process, the CSA has solicited feedback from Canadian market participants, the majority of whom have indicated their support for trade-through protection.

Submissions will be accepted until Jan. 15, 2009, on amendments to National Instruments 21-101, marketplace operation, and 23-101, trading rules, after which an industry committee will provide final input and issue a final set of proposals later in the year.

The proposed rules follow the publication of a CSA discussion paper as well as a public forum in 2005 and a joint notice with the IIROC.

Doug Brown, director of legal and enforcement at the Manitoba Securities Commission in Winnipeg, says the proactive stance by the CSA was required to keep up with the times. “There is more than one way to make a trade today,” he says. “A few years ago, it was through the Toronto Stock Exchange directly; it was the only market. Now there are different trading systems, different markets and alternative trading systems.

“If I’m putting my order in one system,” he adds, “how do we ensure I’m not missing the market that might have a better price? You want the best buy/sell match as possible. What’s being developed are computer systems that will run through each of the markets and figure out where the best place to put the order is.”

Brown says the CSA isn’t reacting to a real problem but is being proactive to a potential challenge.

“These alternative trading systems haven’t been around for very many years,” he says. “They’re still a very small portion of the market. We’re anticipating something that could happen.”

Brown notes the TSX still represents more than 90% of the market but the alternative players are growing in both size and number.

The trick is that not all markets are equal, he says. Some have small volumes while others don’t have a lot of history. The proposed rules are meant to provide some flexibility.

Practically, you can’t have access to every possible market out there. “If I’m responsible for processing client orders,” Brown says, “I need to have policies in place to evaluate each of the markets in which the order might be filled and determine which ones are realistic to route the order through. It’s not a situation in which you go straight to the TSX and fill it. There are options to fill it.”

Brown cautions that the CSA isn’t forcing industry players to be members of every single marketplace; some marketplaces won’t be able to process certain transactions in a timely manner.

Brown says surveillance activity will be done on market activity to ensure trade-throughs don’t occur. Those that don’t comply will be called on the regulatory carpet.

“The consequence is,” he adds, “you’d be violating a commission rule and there could be action taken against you.” IE