News & Events
Opening Remarks to the OSC-IIROC Market Structure Conference
Vice-Chair, Ontario Securities Commission
June 26, 2012
The OSC is happy to co-host this conference with IIROC. We are pleased to see so many distinguished professionals from the Canadian financial community here to discuss Canada’s equity market.
Today we’ll exchange ideas about important issues related to the Canadian equity market: its evolution, its competitiveness and its future. Equity markets and their structure play an important role in capital formation and growth. The term “market structure” is often used to refer to specific marketplaces that trade securities and the rules under which they operate. But it’s a broader idea than that. It’s an idea that underpins how our equity markets, as a whole, operate and evolve.
All of us here today have a keen interest in how the market operates, although we bring different perspectives to bear on that interest. Despite varying perspectives, we all share a common interest in sustaining a robust, fair and efficient equity market, which is the cornerstone of Canada’s capital markets. Without that, investors and issuers will step back, impacting liquidity, raising costs of capital and reducing growth.
Meanwhile, our capital markets function within the context of global markets that are undergoing massive change. New marketplaces have emerged, business models are changing and new products continue to proliferate. Markets are growing more interconnected through cross-market trading and market participants.
For example, the number of foreign companies listed on the TSX and TSX Venture Exchange grew by 80 per cent between May 2007 and May of this year. We’ve also seen how the pace and volume of trading have increased significantly. High frequency trading now accounts for more than 50 per cent of U.S. equities traded, twice the share in 2006. And the growth of the use of dark pools has continued over the past year.
At the OSC, we’ve heard from a lot industry stakeholders about the evolution of the market through our consultations and hearings. Some are of the view that the market lacks fairness and others feel that investor protection is being negatively affected. We want to further the debate on those issues today.
In order for Canada’s market structure to continue to evolve, in alignment with emerging global structures, and to continue to have a solid framework, we may need to go back to first principles about what constitutes a fair and efficient market. In our view, such a market is characterized by its integrity, liquidity, transparency, immediacy and competitiveness, particularly in termsof transaction costs.
These core attributes are often inter-connected. Integrity and transparency are closely associated with investor perceptions of fairness and, therefore, underpin their confidence in the market. Liquidity, immediacy and competitiveness are linked to efficiency, especially with respect to capital formation. It is essential that we assess policy and regulatory responses against these established criteria and that the work that we do supports these attributes.
We need to ensure that markets provide open and fair access for investment. Rules of conduct must prevent abuse and manipulative practices, and enforcement of those rules will promote integrity. Adaptable, orderly markets are resilient and effective and they benefit investors, market participants and the capital formation that’s necessary for economic growth.
As part of our regulatory considerations, we examine structures, business conduct, innovation and capital formation. We develop our regulatory requirements to keep pace with market developments without stifling innovation. We also try to act in collaboration with other regulators internationally, especially through our work in the International Organization of Securities Commissions (IOSCO).
Ontario’s regulatory framework has been designed to accommodate competitive markets. In 2002, there were four equity marketplaces in Ontario – today there are 11, including, of course, ATSs and dark pools. The fragmentation that competition brings has been largely managed in Canada through the consolidation of data, the use of smart order routers and the consolidation of market surveillance across all equity marketplaces, performed by IIROC.
Canada has also been ahead of the curve in a number of policy areas, including the electronic trading rule, rules related to dark pools and the alignment of regulatory requirements between exchanges and ATSs. We implemented DEA identifiers for clients long before many other jurisdictions and we will continue to examine issues – like the maker-taker model and data fees – that impact Canadian and global markets.
We’ve also considered a variety of complex issues in the context of the Maple application and the changing infrastructure landscape. Our consideration of the public interest that is necessary to keep our framework strong is evident in the terms and conditions of the proposed recognition orders for Maple, TMX Group, TSX and CDS. We expect to bring this matter back to the Commission for final consideration shortly.
To conclude, the OSC addresses the key market structure issues to ensure that rules and regulatory requirements are tailored to the needs of our market. We will continue to draw from the key characteristics of an ideal market, and also to draw from your experiences and views.
To have confidence in the market, we must continually ask whether, as it evolves, the market meets the needs of all participants and continues to be fair and efficient.
We want to emphasize the importance that the OSC places on consultations with its stakeholders. Our goal is to align the development of market structure policy with our public interest mandate to foster fair and efficient capital markets and confidence in those markets. Our common goal is achieve the highest quality markets with the greatest degree of market integrity.
Thank you for attending the OSC-IIROC Market Structure Conference. We look forward to today’s discussions.