Securities commissions in five provinces say they plan to issue a concept paper in June to address issues relating to order execution, such as whether speed of execution should be put ahead of price consideration.

The paper by securities commissions in Alberta, British Columbia, Manitoba, Ontario and Quebec will address issues relating to executing orders at the best price available in any marketplace in Canada, often referred to as the “trade-through” rule.

A 90-day comment period will follow the June paper, with a proposed solution to be in place by the fall.

The current regime in Canada set out in the Universal Market Integrity Rules (UMIR) places obligations on dealers when they are acting as agents for both best execution and best price. Market Regulation Services Inc. (RS) has approached the five provincial regulators to consider immediately implementing a rule aimed at reducing potential trade-throughs by institutional investors.

A trade-through occurs when a trade is executed at a price that is inferior to the best available price. Current regulation in the UMIR places a best-price obligation on participants therefore preventing trades “through” the best available price.

The five regulators say they do not believe that implementation without public comment is appropriate at this time. In light of the complexity and importance of the issue, the five regulators believe it is important to have a full and transparent debate before any changes are made.

“We appreciate RS’s position on the issue and look forward to working cooperatively to find a solution that accommodates all stakeholders’ points of view in as fair a manner as possible,” said David Brown, Chair of the Ontario Securities Commission, in a release. “We believe that as the regulatory landscape shifts, we must continuously update our rules – but the debate must always be open and transparent.”

The concept paper will address the scope of the trade-through obligation and the flexibility available to traders, whether it applies to dealers or institutional investors, and whether factors such as speed of execution should be put ahead of price consideration.

The regulators say these issues are becoming increasingly important as Canada’s market matures and large block trades become more common in our marketplaces.

“Clearly, the resolution of this issue will affect small investors – both as direct investors and as mutual fund holders or pensioners of the large institutions. It is a question of balance. The rules that govern how trading is permitted may seem arcane to some, but the fairness they promote has a true impact on every one of us,” said Brown.

“The challenge we face in this evolving market is similar to the challenge faced in every jurisdiction globally: how to balance fairness for all investors with efficiency and innovation. We must consider adaptations carefully to ensure that we get it right,” Brown added.

Randee Pavalow, OSC Director of Capital Markets, said that the U.S. Securities and Exchange Commission has examined the issue over the past two years. “Their experience can contribute to our understanding of the impact of potential rule changes. We have closely monitored their discussion of the issues.”

Noting that the current rules could lead to trades that favour speed of execution and anonymity over price, the five provincial regulators say they would ensure that marketplaces monitor trades vigilantly to ensure market integrity. The surveillance will rely on the cooperation among the country’s securities regulators and the self-regulatory organizations (SROs), including RS Inc.

“We intend to issue the concept paper in June for a 90-day comment period, and subsequently develop a proposed solution by the fall,” said Pavalow. “The debate is highly technical and we are hearing strong, divergent views from different parties, so we must ensure that we take the time to hear from all stakeholders and come up with the right solution.”