Canadian securities regulators are implementing a new regulatory framework for so-called dark orders that aims to ensure that small investors are protected from the effects of the growth in dark liquidity, while also allowing large, institutional traders to utilize these facilities.

The Canadian Securities Administrators and the Investment Industry Regulatory Organization of Canada Friday announced that they are implementing a new regulatory framework for the use of orders entered without pre-trade transparency (aka dark orders). Under the framework, regulators will require that visible orders take priority over dark orders on the same marketplace at the same price; and, they’ll require that smaller orders receive a minimum level of price improvement in order to trade with a dark order. The rule changes are to take effect Oct. 10.

Regulators are also giving IIROC the ability to designate a minimum size for dark orders, but they are not setting a minimum at this point. Instead, the CSA and IIROC say they will monitor market developments closely to consider whether to implement a minimum size; and, if so, when. IIROC will also be able to designate a minimum size of an iceberg order that must be displayed.

The amendments define price improvement as a minimum of one trading increment except, when the difference between the bid-ask is one trading increment, then it will be a minimum of half a trading increment. Smaller orders that require price improvement are defined as orders of less than 50 standard trading units, or with a value of less than $100,000.

The proposed rule amendments come after an extensive consultation process carried out by the CSA and IIROC over the past few years in order to address the emergence of dark pools and dark orders. The regulators say the rules are designed to enable institutional traders to continue to execute large orders with minimal market impact, while ensuring that investors with smaller orders receive meaningful price improvement when they trade with dark orders.

“The new rule framework recognizes the increasing use of dark liquidity and balances displayed and dark liquidity for healthy price discovery,” said Susan Wolburgh Jenah, president and CEO of IIROC. “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.”