Canadian Regulators Are Blazing The Market Structure Reform Trail


Our friends to the north continue to impress us with their forward thinking on market structure issues.  Yesterday, the Canadian Securities Administrators (CSA) published some changes that they would like to make their Order Protection Rule.  These changes included three issues which we have been advocating for in the US :

1) Minimum market share for displayed quote status:

“Establish a market share threshold of five per cent, at or above which a marketplace’s displayed orders are protected under OPR. Exchanges that do not meet the threshold will be protected only for their listed securities.​”

2) Disclosure:

Introduce new requirements that would mandate specific dealer disclosure relating to best execution policies.”

3) End of Maker Taker Pilot Program:

Introduce a pilot study to examine the impact of disallowing the payment of rebates by marketplaces (“maker-taker” pilot study).​”

The CSA said they identified a number of issues in their current rules where costs and inefficiencies were outweighing the benefits of the rules.  Particularly on maker taker, they said:

“We are concerned that the payment of rebates is incentivizing behaviours in ways which may have a negative impact on our market. The rebate payment raises the potential for conflicts of interest in routing decisions on the part of dealers managing client orders.

It is refreshing to see the Canadian regulators admit that there is a problem with their existing rules and begin to fix it.  They have pinpointed specific issues and are not  looking to rewrite their entire order protection rule.  Just like in professional sports, when rules are no longer working or loopholes have been discovered, it’s up to those tasked with overseeing the organization to make sure that the rules are updated.  There should be no shame involved when updating a rule to ensure fairness in an organization.

We think our regulators should take this same approach to Reg NMS.   They need to admit that there are problems with the 2007 rule but they do not need to rewrite the entire rule.   The so called “holistic approach” that many status-quo market structure folks are advocating will take too long and probably end up creating another monstrosity that will have a entire new set of unintended consequences.  Rather, regulators need to surgically address the areas that can  quickly be fixed like the maker/taker model.