Comment letters support best execution obligation

Let the computers do it. That was the take of many securities market participants filing comment letters in response to the Canadian Securities Administrators’ discussion paper on market structure developments and trade-through obligations. By and large, they indicated the centralized limit order book does a good job of exposing prices and helps dealers fulfill their obligation to obtain the best prices for clients.

And, of course, efficient price exposure will have to be maintained as Alternative Trading Systems (ATSs) emerge in Canada. ATS trading venues like Bloomberg Tradebook Canada and Liquidnet Canada have been operational for some time and the field recently expanded with the introduction of Markets Inc. and TriAct Canada.

Scotia Capital’s comments noted the best price obligation is “largely systems enforced” and that going forward it should be mandatory for all marketplaces to be electronically integrated with a consolidated feed and display. Failing that, Scotia said there should at least be a compatible allocation algorithm for inter-marketplace order routing. “This way, buy orders can be automatically and consistently routed and matched to the best corresponding sell orders irrespective of which marketplace the orders were originally entered on and thereby minimizing the need for manual intervention by market participants and access persons,” Scotia Capital’s letter said. “Certain rules, such as for example trade-through protection, best-price obligation, etc. could be system designed by marketplaces to be enforced automatically and efficiently.”

Doug Steiner, CEO of Perimeter Financial Corporation, added the best price obligations currently being applied to the equity markets should also extend to fixed income. “We are concerned that there is no clear and unambiguous best execution obligation in the fixed income market,” his letter stated. “As a result, we think it is incumbent on the CSA and/or IDA to adopt clear best execution rules for the retail fixed income market that establish not only that such rules apply to principal transactions as well as agency transactions, but that the pricing and offerings of all freely accessible ATSs providing a fixed income marketplace should be reviewed before transacting as principal with retail clients.”

Andrew Jappy, CIO of Canaccord Capital, suggested ATSs be required to use common stock symbols. He noted trade-through problems are created when inter-listed stocks carry either three-character or four-character symbols, depending on the trading venue.

An interim proposal by stock market regulator RS to extend trade-through obligations to both dealers and non-dealers alike was also generally well-received. TD Newcrest said certain situations called for a limit on the ability to trade through. “In particular we support the exemptions for portfolio trades and other transactions like Volume Weighted Average Price trades where the execution price is not known at the time of order entry,” said comments signed by trading executives Peter Haynes and Ray Tucker. “We also agree with the exclusion of iceberg orders from price protection.”

Filed by Philip Porado, Advisor’s Edge, philip.porado@advisor.rogers.com