Market Regulation Services Inc. is proposing amendments to its trading rules to ensure fair application of trade-through protection in Canadian markets by imposing these obligations on alternative trading systems.

The move follows the SEC’s decision this week to extend trade-through protection to the Nasdaq.

In a notice Friday, RS said its board believes that the Universal Market Integrity Rules do not currently ensure neutral application to investors of the provisions relating to “trade-through” protection and has approved amendments to UMIR to address this concern.

Currently under UMIR, market participants have the obligation to fill better-priced orders on a Canadian marketplace before executing a trade at an inferior price on another Canadian or on a foreign marketplace.

Under the current rules, investors trading as ‘access persons’ (non-dealer subscribers to an alternative trading system) are, in certain circumstances, not subject to the same trade-through obligations (allowing them to “trade through” that better price).

“This means that without a neutral application of trade through obligations, an investor with a better-priced order on a Canadian marketplace could be bypassed by another investor executing a trade on another Canadian marketplace at an inferior price,” RS said.

“Of particular concern is the fact that the most likely orders to be bypassed would be small orders from retail investors.”

To correct this, RS’ board has approved the re-publication and submission to the securities regulators of proposed amendments as two separate notices. One notice will deal specifically with the extension of the trade-through obligation to access persons and confirms the board’s view that participants and access persons have an equal obligation to fill better-priced orders. The notice will specifically request comment on the most efficient and cost-effective means of ensuring compliance with the trade-through obligations.

The other notice will deal with all other issues relating to “off-marketplace trades”. Both notices will go out for a 30-day comment period.

RS originally published proposed amendments to UMIR dealing with trade-through protection in August 2004. The revised amendments reflect comments from the public and from the securities regulatory authorities on that original proposal. Under the revised amendments, an access person trading on its own behalf will have the same “trade-through” obligations that a participant has when trading on its own behalf, or on behalf of that access person as a client.

“Specifically, this means that the Access Person should not be allowed to by-pass better-priced orders displayed on a Canadian marketplace to which the Access Person has trading access,” it said. “To permit otherwise would create an unfair situation where a Participant has a greater obligation to ensure that the better-priced orders of any investor are honoured than would an Access Person.”

RS reports the board believes that it is of “the utmost importance to market integrity that the unequal treatment of investors’ orders with respect to trade through protection be addressed as soon as possible.”

Earlier this week, the SEC passed Regulation NMS in a contentious vote, which establishes a uniform trade-through rule for all market centres and affirms the fundamental principle of price priority. The rule is controversial because some critics say it improperly values best price over the speed of execution, and favours small investors at the expense of pro traders.

RS’ notice says, “Investor confidence in the integrity of the marketplace can only be assured when individual investors believe that their orders have achieved best price.”