TSX Inc. is proposing changes to the rules for dark trading, allowing for tighter trading spreads, while consulting on possible reforms to the allocations of fees and rebates for unintentional crosses.
On Thursday, the exchange published proposed changes to the trading rules for dark orders on the Toronto Stock Exchange (TSX), TSX Alpha Exchange, and TSX Venture Exchange (TSXV), which would revise the methodology for ensuring price improvement for dark trades.
According to a notice setting out the proposed changes, while trades on lit markets can, in certain circumstances, be executed with half a tick (trading increment) being considered as the required price improvement, dark trades always reprice by a full tick.
As a result, for securities where the spread between the bid and offer is already just one tick, these orders cannot be executed. Now, the TSX is proposing changes to allow dark orders to execute at half tick price improvements.
“By implementing half tick price improvements … we anticipate that the likelihood of small order interactions will increase, thereby improving execution rates and overall market liquidity,” the exchange said in its notice.
“We believe the proposed structure may help increase liquidity, reduce missed trading opportunities, and ensure a steady flow of trades, especially in markets where tight spreads are common,” it added.
TSX Inc. is also proposing amendments to allow for one tick price improvements for passive orders in securities where the spread is two ticks or more. This change would, “benefit the passive side for price improvement for certain large or small orders,” it said.
The proposals are out for comment until Jan. 20, 2025. The exchange said it intends to adopt the changes in the first quarter of 2025, subject to regulatory approval.
Separately, TMX Markets has published a consultation paper that seeks industry feedback on the allocation of fees and rebates for unintentional cross trades.
Currently, brokers can allocate, “fees and rebates asymmetrically between the active and passive sides of an unintentional cross trade, provided the net fee to the marketplace remains zero,” it noted.
The consultation noted that firms typically provide rebates to the active side of these trades, which often represents retail order flow, in an effort to encourage retail participation, while the passive side of these trades, which is usually institutional, would be charged a fee.
The exchange is seeking feedback from the industry about this approach.
Among other things, it asking whether these fees/rebates should be subject to any limits, whether this activity introduces any risks to the market, and if it impacts market liquidity and price discovery.
“TMX Markets understands that there are conflicting views in the Canadian landscape on the appropriateness of [this practice],” the exchange said, adding that it’s seeking feedback on the risks and benefits to market structure.
“TMX is committed to fostering innovation while ensuring a fair and transparent market structure. As such, we are seeking industry feedback to better understand the benefits, risks, and overall impact of this model in Canada.”
That consultation is open until Jan. 31, 2025.