New rules ahead of Pure Trading launch

After receiving considerable dealer input, the Universal Market Integrity Rules are ready to accommodate the introduction of multiple marketplaces. The same can’t be said for Pure Trading, the new market that precipitated the rule changes in the first place, which has delayed its launch for the second time.

Pure Trading was due to hard-launch on March 9, but after encountering a number of issues over the weekend, the exchange has decided to postpone the launch. The problems were related to retransmission procedures that prevented the new exchange from completing its capacity testing as not all of the dealers and service providers were ready for the launch.

The exchange will set a new launch date after it has had a chance to consult with the industry. In the meantime, Pure Trading will continue to run tests on its systems.

In a release, Pure Trading reaffirmed the importance of completing the industry-wide production testing, calling it essential to a successful launch. Ian Brandeen, CEO and vice-chairman of Pure Trading, downplayed the delay. “The launch date per say in the grand scheme of things is not the big issue,” he says. “What it really reflects is the best estimate of when the majority of participants will be able, directly or indirectly through their third party service providers, will they be able to efficiently and at high speed access the multi-market environment and take advantage of it.”

There were other time concerns aside from the results of the latest test that were more germane to the delay, he adds. It’s a challenge to get all of the players ready. “It’s tempting to rush ahead, but in the long run it makes a lot more sense to be very careful and very through to do it in a responsible manner.”

Most of the issues have been addressed, he says. Virtually all of the major players have signed on. Just over 50 dealers have signed on to Pure Trading, representing about 93% of the historical daily volume on the TSX.

While Brandeen says Pure Trading is working out a new launch date with its partners he says the start date for the exchange is imminent and should be fully functional before the summer.

“This is part of a much bigger evolution that is happening globally to the adoption of electronic trading and the emergence of multi market trading environments,” he says. “This will likely be…beneficial for al participants, including the incumbents.”

In a notice on Monday, Market Regulation Services (RS) rolled out the new provisions to accommodate the introduction of competitive marketplaces. The notice covers a broad range of points, but changes to the best price obligations and best execution are the ones that will have the greatest impact on dealers.

Before the amendments were approved, dealers’ obligations were limited to the markets where they had actual trading access. That wasn’t an issue when there was only the TSX to worry about. But with the impending launch of Pure Trading, the rules needed to be brought up to date.

The rules didn’t require a complete rewrite to accommodate Pure Trading. Canada at one point had five competitive exchanges, says James Twiss, chief policy council at RS. “The UMIR anticipated that there would be multiple marketplaces, but it didn’t fully anticipate some of the features that would be attached to the marketplace.”

Under the new rules, dealers will be required to get the best price for their clients regardless of whether it’s on the TSX or Pure Trading, whether they have access to that market or not. In those cases where dealers don’t have access to a market, presumably Pure, the member will have to make arrangements through a jitney to put orders on the exchange if it offers the best price.

There is no requirement to become a member of a particular exchange — only that dealers establish arrangements with existing members, Twiss says. Only about half of the dealers in Canada are a member of an exchange right now, he adds.

Large dealers will likely find it beneficial to become members of all exchanges, Twiss says, but the smaller dealers who pay a carrying broker for the service will continue to work as they do today.

Another challenge that dealers will have to accommodate under the new rules will be explaining to their clients how the launch of the new market will impact them. For instance, if a client gives a dealer an order at 9:15 a.m., before the TSX opens, then the client would have to clearly understand what market the dealer is going to use, Twiss says.

“Each of the dealers is going to have to make it clear to their clients what it is that they will be doing outside of the core hours of the TSX or the principal marketplace,” he explains. Although the new market rules don’t dictate to the firm how to handle this situation.

“It will be incumbent on the firm to set its best execution policy and communicate that with the client,” Twiss says. “Each firm can set its own policy as long as they make sure the clients are informed,” he says.

Twiss made it clear that this is a transitional phase, adding that the securities commissions will also be issuing proposals with respect to trade-through and best execution, which could impact RS’s rules. “This isn’t the end game.”

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(03/01/07)