Regulators have shot down a proposed new order type that alternative trading system Alpha ATS LP was seeking to introduce.

In a staff notice published Tuesday, the Ontario Securities Commission indicates that it has completed a review of Alpha’s proposed IntraSpread facility – a set of new order types that would allow its subscribers to seek order matches within their firm without pre-trade transparency, while providing for guaranteed price improvement for active orders.

In the notice, the OSC acknowledges that while there is precedent for a marketplace to offer similar internalized order types, this is the first time that these order types are being proposed since revised ATS rules were introduced in 2005. “Since that time, the Canadian market has evolved dramatically, giving rise to new issues and concerns and providing for greater perspective. As the market has evolved, so have staff’s views on various matters, including internalize-only order types and features,” it says.

Regulators say they have reconsidered their position on these order types and now believe that, “a marketplace that offers order types that allow for an order to be systematically restricted from interacting with the orders of other participants is operating in a manner that is inconsistent with the fair access requirements.”

The OSC indicates that as a result of this new policy position it has discussed the matter with Alpha, and it has decided not to implement the new facility as it was initially proposed. It has amended its proposal, and is publishing that for comment.

Alpha says its revised proposal aims to address the regulatory concerns, while also preserving the benefits of the proposal, including reduced trading fees, price improvement and increased trade size for the active side, and improved access to liquidity for the passive side. The revised facility “is designed to allow matching of orders between dealers, with additional features designed to maximize benefits for the active, retail order flow and minimize potential for ‘gaming’ the passive liquidity providing flow,” it says.

The objective of both the original, and revised, proposal “is to provide choice and options to accommodate different trading strategies and marketplace participants,” Alpha says. It suggests that some of the strategies that would benefit from using the facility include: enabling the retail flow to participate on the active side and receive a guaranteed price improvement, a larger fill size and a lower active fee; enabling buy side clients to post dark orders and benefit from accessing the active flows; and enabling liquidity providers to post dark orders to benefit from access to the active flows.

The OSC indicates that it has also spoken with the other marketplace currently offering a similar internalize-only order type, “with the objective of facilitating the discontinuance of the use of this order type by February 1, 2011”.

IE