The launch of cana-dian trad-ing and Quotation System Inc.’s Pure Trading alternative trading system for Toronto Stock Exchange-listed securities — scheduled for this month — brings new complexities, compliance and liability issues, and costs to the doorsteps of Investment Dealers Association of Canada members.

In addition, Market Regulation Services Inc. ’s Market Integrity notices 2006-017 and 2006-020 create new requirements for best execution and best price, as well as revised positions — through clarification comments — on what constitutes “reasonable” efforts to discover the best price.

What this means for the smaller, independent brokerages is really no different from what it means to the large, bank-owned dealers. However, because of issues of scale, it will have a greater impact for the smaller company. Here’s how these changes will affect brokerages:

> Increased Complexities. Although Pure Trading is today’s big focus, it probably will not be long before TriAct Canada Marketplace LP, Shorcan ATS Ltd. (which was purchased by the TSX in October) and others are added to the list. These additional markets will present firms with more options for trade routing and more decision-making — in some cases, without full information.

RS requires that reasonable efforts to provide best execution include considering: markets that do not provide pre-trade price transparency; “dark liquidity pools,” which are ATSes that cross orders without publishing public bids and offers (executions occurring in these pools are priced derivatively off public market prices); and even overseas markets.

> Increased Liability. With more options and greater “grey area” decision-making, there will be greater opportunity for error. As a result, clients may decide that they did not receive the “best price.” So, the focus will be on how it’s possible to defend these decisions, especially if some of them are to be made based on incomplete information within a short time frame.

> Increased Compliance requirements. Audit trails of trades made on more markets, separate confirmations for fills on different markets and increased requirements for trading supervision will all add to the compliance cost burden.

> Increased Costs. Increased liability and compliance requirements will result in higher costs. For instance, some of these increased costs will come from implementing technology to integrate new best-market order-routing capability across multiple marketplaces and integrating data from the different markets — especially when some of these new markets will not provide quotation or execution data via traditional data consolidators.

Will these costs be passed on to the client? That’s highly unlikely. And, given the competitive nature of the market, the large players are likely to absorb the additional expense, so the smaller players will be forced to follow suit.

This will, of course, add to the pressures independent firms already feel and is likely to increase the need for them to leverage off investments made by other, larger firms.

So, what can an independent firm do? If the firm is a self-clearer, it should develop a policy for best execution in a multiple-market environment. If it’s an introducing broker, the firm needs to ensure its carrying broker has a policy and that it’s fully understood.

There are still many grey areas in best execution, and any position taken will be much more defensible if it is consistent with a policy that the firm has set out ahead of time.

It’s also important to communicate that policy to clients and advisors. Again, the firm’s position — in the event it will have to be defended — will be stronger if all parties involved have been made aware of it in advance. If the firm has not yet done this, the delay with the rollout of Pure Trading has provided some additional breathing space.

The firm must also make its voice heard and be involved. And even though this is a difficult undertaking for independent firms — as the time and resources to do this are always in short supply — it is critical. For instance, when RS asked for comments on its intended approach in MIN 2006-019, there were only 20 responses. (These responses can be found and reviewed on RS’s Web site.) Of these 20 responses, fewer than half were from independent dealers. It is critical for independent dealers to have their voices heard, and, perhaps, if not directly, through an entity with a similar philosophy or outlook. IE

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David Tasker is vice president of Pinnacle Correspondent Services, a division of Canaccord Capital Corp.