NOTICE OF PROPOSED CHANGES AND REQUEST FOR COMMENT
Liquidnet Canada is publishing this Notice of Proposed Changes in accordance with the “Process for the Review and Approval of the Information Contained in Form 21-101F2 and the Exhibits Thereto.” Market participants are invited to provide the Commission with comment on the proposed changes.
Comment on the proposed changes should be in writing and submitted by December 23, 2019 to
Market Regulation Branch
Ontario Securities Commission
20 Queen Street West
Toronto, ON M5H 3S8
Fax : (416) 595-8940
Liquidnet Canada Inc.
498 Seventh Avenue
New York, NY 10018
Comments received will be made public on the OSC website. Upon completion of the Review by OSC staff, and in the absence of any regulatory concerns, notice will be published to confirm the completion of Commission staff’s review and to outline the intended implementation date of the changes.
Any questions regarding the information below should be addressed to:
Head of Liquidnet Canada
Liquidnet Canada Inc.
79 Wellington Street West – Suite 2403
TD South Tower
Toronto, ON M5K 1K2
Liquidnet Canada proposes to introduce the following changes to the Liquidnet Canada trading system:
- Changes to existing broker blocks functionality
- Description of the proposed change
As previously approved by the Commission, IIROC-registered brokers seeking to execute blocks (known as Liquidity Partners or LPs) can send resting orders in Canadian equities to the Liquidnet Canada ATS. LPs may elect whether or not to display their resting orders to matching buy-side contras via the Liquidnet desktop application. If an LP has elected to display its orders, a buy-side participant (known as a Member) with an opposite-side indication to an LP resting order can receive notification of the LP resting order as a broker block opportunity (denoted by a small indicator on the match notification). A broker block notification is only provided to a Member when the limit price specified by the LP for its buy resting order is at or above the mid-price, or when the limit price specified by the LP for its sell resting order is at or below the mid-price. If a notification is provided and the mid-price subsequently moves above the limit price of the LP’s buy order, or below the limit price of the LP’s sell order, this is indicated in the notification to the Member. Once notified, the Member can choose whether to act on a broker block opportunity by creating a resting order known as a “broker block accept.” The minimum broker block execution quantity for Canadian equities is the lesser of 10,000 shares and $100,000 in value and, currently, all broker block executions occur at the mid-price.
If an LP has elected not to display its resting orders to buy-side contras, the LP’s block orders will only execute against other actionable dark orders in the ATS (either other LP orders or buy-side orders). Regardless of whether an LP has elected to display or not, it may transmit resting orders on a firm or conditional basis and the execution fees to LPs are the same in both cases (currently $0.0020 per share).
Liquidnet Canada plans to make the following changes to broker blocks functionality:
- LP resting orders displayed to buy-side participants must be firm orders (while non-displayed orders may continue to be either firm or conditional orders);
- Fees charged to LPs for executions resulting from LP resting orders displayed to buy-side contras will be different and higher than fees for executions resulting from non-displayed LP resting orders1 ; and
- Buy-side participants will have the option to execute against LP resting orders at a price away from the mid-price, but within the best bid/ask (i.e., below the mid-price in the case of a buy-side sell order or above the mid-price in the case of a buy-side buy order). Buy-side participants may also opt to continue only executing against LP resting orders at the mid-price.
To be clear, with regard to the proposed change permitting buy-side participants to execute against an LP resting order at a price away from the mid-price, Liquidnet Canada will only permit such an execution if the buy-side order is for more than 50 standard trading units or has a value of more than CAD$100,000, as per UMIR Rule 6.6.2
B. The expected date of implementation
It is expected that the proposed change will be implemented following the later of (i) the date that Liquidnet Canada is notified that the change is approved and (ii) the date all applicable regulatory requirements have been met.
C. Rationale for the proposed change
Liquidnet Canada plans to implement the proposed changes for several reasons. First, Liquidnet Canada’s European affiliate – which also chiefly operates in attributed markets – currently employs a similar broker blocks model with the goal of increasing actionable, i.e., firm, liquidity in the Liquidnet marketplace and providing buy-side participants with additional, i.e., non-mid, trading opportunities. Given the similarities in market structure between Canada and Europe, Liquidnet believes that this model is also well-suited to the Canadian market. Second, Liquidnet Canada also believes the proposed increase in fees to LPs associated with displayed orders is appropriate given the unique block liquidity in the Liquidnet Canada ATS only accessible via displayed LP orders.3 And third, the proposed change will also discourage arbitrage behavior by brokers who may attempt to offer buy-side clients “equivalent” access to Liquidnet at a rate lower than Liquidnet’s standard rate to buy-side firms participating directly on the Liquidnet Canada ATS.
In addition, Liquidnet’s affiliates in both Europe and the United States currently permit buy-side participants – at their option – to execute against LP resting orders at prices away from the mid-price, so the proposed change will further harmonize broker blocks functionality across regions.
D. Expected impact of the proposed change on market structure, subscribers, investors and capital markets
We foresee no adverse impact on market structure, subscribers, investors or the capital markets because the proposed changes should only increase actionable liquidity and trading opportunities in the Liquidnet Canada ATS for buy-side participants, with an associated fee to LPs that reflects the value of the natural block liquidity accessible via displayed LP orders. In this regard, it should also be noted that brokers are not required to send any order flow to a non-displayed marketplace like the Liquidnet Canada ATS, so brokers who may have objections to the proposed changes are free not to participate.
E. Expected impact of the proposed change on Liquidnet Canada’s compliance with Ontario securities law and the requirements for fair access and maintenance of a fair and orderly market
We foresee no adverse impact on Liquidnet Canada’s compliance with Ontario securities laws or to requirements of fair access and the maintenance of a fair and orderly market. With regard to fair access, the proposed changes regarding different fees to LPs for executions resulting from displayed vs. non-displayed LP orders and requiring that all displayed LP orders be firm orders will apply uniformly to an entire class of subscribers, i.e., to all block order flow from LPs, so there will be no discrimination among broker participants. Similarly, the proposed change permitting buy-side participants to execute their block-size orders against LPs at prices other than the mid-price will be available to all buy-side Members, so there are no fair-access concerns with that aspect of the proposed changes.
F. Consultations undertaken in formulating the proposed change, including internal governance process followed
Liquidnet Canada and its affiliates consulted with certain customers before proceeding with the proposed changes. The proposed changes were approved by the management of Liquidnet Canada.
G. Whether the proposed change will require subscribers and vendors to modify their own systems
The proposed change does not constitute a material change to “technology requirements regarding interfacing with or accessing the marketplace” within the meaning of Part 12.3 of NI 21-101 because subscribers and service vendors will not be required to do any significant amount of systems-related development work or testing to enable the proposed changes or fully interact with the Liquidnet Canada ATS as a result of the proposed change. More particularly, the proposed functionality has already been developed, tested and implemented in other jurisdictions, e.g., Europe, so Liquidnet Canada need only make minor back-end changes in order to implement the proposed change for Canada broker blocks.
H. Whether the proposed change would introduce a fee model or feature that currently exists in other markets or jurisdictions
The proposed changes to the broker blocks offering have been implemented by Liquidnet Canada’s European affiliate.
- Pursuant to Section 3.2(2) of NI 21-101, Liquidnet Canada will separately submit a proposed amendment to Exhibit L to Form 21-101F2 regarding this contemplated fee change. At present, Liquidnet Canada plans to charge LPs $0.0050 per share for executions resulting from orders displayed to buy-side contras, while the fee to LPs for executions resulting from non-displayed orders would remain at the current rate of $0.0020 per share.
- Liquidnet Canada will also take into account the approved amendments to UMIR Rule 6.6 (effective February 4, 2020) as per IIROC Notice 19-0134, which add a minimum order value of CAD$30,000 to the current volume threshold of 50 standard trading units.
- Non-displayed orders will generally result in fewer trading opportunities for LPs (and their underlying customers) when compared to displayed orders.