NoticeDec 03, 2004
Notice 2004-009 - Off Market Orders
December 3, 2004
REQUEST FOR COMMENTS � ENTRY OF OFF-MARKET ORDERS BY NON MARKET MAKERS
On November 9, 2004, the Board of Directors of CNQ approved a rule amendment that would allow CNQ Dealers that are not market makers to enter certain orders directly for stocks that have market makers. The proposed amendments are attached to this notice as Appendix �A.�
The Board has determined that the proposed amendments are in the public interest and have authorized them to be published for public notice and comments. Comments should be made no later than 30 days from the date of publication of this notice and should be addressed to:
Canadian Trading and Quotation System Inc.
BCE Place, 161 Bay Street
Suite 3850, P.O. Box 207
Toronto ON
M5J 2S1
Attention: Mark Faulkner, Director, Listings and Regulation
Fax: 416.572.4160
E-mail: [email protected]
A copy should be provided to the Ontario Securities Commission at the following address:
Capital Markets Branch
Ontario Securities Commission
Suite 1903, Box 55
20 Queen Street West
Toronto ON
M5H 3S8
Attention: Cindy Petlock, Manager, Market Regulation
Fax: 416.595.8940
E-mail: [email protected]
Background
Currently, CNQ Dealers that are not a market maker in a market maker security are restricted to entering client orders to trade with the bid or offer (�client matching orders�) and crosses between the bid and offer. All other orders must be given to a market maker for entry.
Given the increase in order flow through CNQ Market Makers, the proposed rule change would allow Non-Market Maker CNQ Dealers to enter additional order types on Market Maker securities. The purpose of the rule change is to improve the efficiency of the trading model by reducing the obligation of the Market Makers and increasing the ability of CNQ Dealers to manage their own order flow.
Rationale
As order flow increases, there is an unreasonable burden placed on Market Makers that receive non-tradable orders outside the best bid/ask, and the subsequent changes to and cancellations of those orders. There is little or no benefit to participants in having the Market Maker enter �outside� orders, especially when there is a high level of order activity with little or no chance of the Market Maker providing fills for those orders. Allowing direct order entry will remove the obligation of the Market Maker to handle such orders and facilitate more timely entry, CFOs and cancellations by the originating CNQ Dealer, making the process more efficient.
Description of Rule Change
The change to the order entry rule, which restricts order entry to Market Makers, would allow approved traders at all CNQ Dealers to enter:
(i) Buy orders at prices equal to or less than the existing bid price, and
(ii) Sell orders at prices equal to or higher than the existing offer price
of a Market Maker security, including orders for client and non-client accounts.
The Rule change would still require that orders to improve the market are directed to Market Makers pursuant to existing Rule 4-107(5) & (6).
Impact
The proposed change will not require any technological changes or development by CNQ Dealers. The rule will not require CNQ Dealers to enter orders directly, it simply provides that option. The order flow through Market Makers will be reduced, and orders for CNQ Dealers will be more easily identified in the CNQ system, allowing CNQ Dealers to more effectively manage their orders. There will be no direct costs associated with compliance.
In market data displays orders will be clearly identified by the clearing number of the originating CNQ Dealer, improving transparency and providing more accurate information to market participants and investors.
Consultation
The proposed rule change was approved by CNQ�s Dealer Advisory Group, comprised of traders from market-making and non-market-making firms.
Alternatives Considered
CNQ considered allowing any CNQ Dealer to enter any type of orders for a market maker stock without restriction. It was determined that such a change would conflict with the Market Maker system rather than enhance it, making it unattractive for a firm to commit to providing liquidity.
Comparable Rules
No other Canadian stock exchange requires orders to be given to market makers. CNQ requires certain orders to be given to market makers as it provides the possibility of price improvement and better execution.
APPENDIX �A�
BE IT RESOLVED THAT:
1. Rule 4-107(2) is hereby amended by deleting the word �or� after �Client Matching Order� and by deleting the phrase �after the opening of trading.�
2. Rule 4-107(2) is further amended by adding the following clauses:
�(c) a client or non-client buy order with a limit price equal to or lower than the bid at the time of order entry; and
(d) a client or non-client sell order with a limit price equal to or higher than the ask at the time of order entry.�
PASSED this 9th day of November, 2004, to be effective upon Ontario Securities Commission approval following public notice and comment.
�Ian Bandeen� Chairman
�Timothy Baikie�
Secretary
APPENDIX B
BLACKLINED AGAINST CURRENT RULE,
Rule 4-107 Entry of Orders for Market Maker Securities.
(1) Subject to Rule 4-107(2), only a Designated Market Maker may enter
(a) orders and
(b) crosses at any price between the bid and offer
into the CNQ System for a Market Maker security.
(2) A CNQ Dealer other than a Designated Market Maker may enter into the CNQ System
(a) a Client Matching Order; or
(b) a cross at any price between the bid and ask;
(c) a client or non-client buy order with a limit price equal to or lower than the bid at the time of order entry; and
(d) a client or non-client sell order with a limit price equal to or higher than the ask at the time of order entry
for such securities after the opening of trading.
(3) & (4) - (not applicable, both relate to partially disclosed orders)
(5) CNQ Dealers other than a Designated Market Maker shall, subject to Rules 4-107(2) and (6), direct orders to one or more Designated Market Makers.
(6) A CNQ Dealer may direct part or all of a Client Matching Order to a Market Maker for execution or entry into the CNQ System, including any unfilled portion of the order previously directly entered into the CNQ System by the CNQ Dealer pursuant to Rule 4-107(2).
REQUEST FOR COMMENTS � ENTRY OF OFF-MARKET ORDERS BY NON MARKET MAKERS
On November 9, 2004, the Board of Directors of CNQ approved a rule amendment that would allow CNQ Dealers that are not market makers to enter certain orders directly for stocks that have market makers. The proposed amendments are attached to this notice as Appendix �A.�
The Board has determined that the proposed amendments are in the public interest and have authorized them to be published for public notice and comments. Comments should be made no later than 30 days from the date of publication of this notice and should be addressed to:
Canadian Trading and Quotation System Inc.
BCE Place, 161 Bay Street
Suite 3850, P.O. Box 207
Toronto ON
M5J 2S1
Attention: Mark Faulkner, Director, Listings and Regulation
Fax: 416.572.4160
E-mail: [email protected]
A copy should be provided to the Ontario Securities Commission at the following address:
Capital Markets Branch
Ontario Securities Commission
Suite 1903, Box 55
20 Queen Street West
Toronto ON
M5H 3S8
Attention: Cindy Petlock, Manager, Market Regulation
Fax: 416.595.8940
E-mail: [email protected]
Background
Currently, CNQ Dealers that are not a market maker in a market maker security are restricted to entering client orders to trade with the bid or offer (�client matching orders�) and crosses between the bid and offer. All other orders must be given to a market maker for entry.
Given the increase in order flow through CNQ Market Makers, the proposed rule change would allow Non-Market Maker CNQ Dealers to enter additional order types on Market Maker securities. The purpose of the rule change is to improve the efficiency of the trading model by reducing the obligation of the Market Makers and increasing the ability of CNQ Dealers to manage their own order flow.
Rationale
As order flow increases, there is an unreasonable burden placed on Market Makers that receive non-tradable orders outside the best bid/ask, and the subsequent changes to and cancellations of those orders. There is little or no benefit to participants in having the Market Maker enter �outside� orders, especially when there is a high level of order activity with little or no chance of the Market Maker providing fills for those orders. Allowing direct order entry will remove the obligation of the Market Maker to handle such orders and facilitate more timely entry, CFOs and cancellations by the originating CNQ Dealer, making the process more efficient.
Description of Rule Change
The change to the order entry rule, which restricts order entry to Market Makers, would allow approved traders at all CNQ Dealers to enter:
(i) Buy orders at prices equal to or less than the existing bid price, and
(ii) Sell orders at prices equal to or higher than the existing offer price
of a Market Maker security, including orders for client and non-client accounts.
The Rule change would still require that orders to improve the market are directed to Market Makers pursuant to existing Rule 4-107(5) & (6).
Impact
The proposed change will not require any technological changes or development by CNQ Dealers. The rule will not require CNQ Dealers to enter orders directly, it simply provides that option. The order flow through Market Makers will be reduced, and orders for CNQ Dealers will be more easily identified in the CNQ system, allowing CNQ Dealers to more effectively manage their orders. There will be no direct costs associated with compliance.
In market data displays orders will be clearly identified by the clearing number of the originating CNQ Dealer, improving transparency and providing more accurate information to market participants and investors.
Consultation
The proposed rule change was approved by CNQ�s Dealer Advisory Group, comprised of traders from market-making and non-market-making firms.
Alternatives Considered
CNQ considered allowing any CNQ Dealer to enter any type of orders for a market maker stock without restriction. It was determined that such a change would conflict with the Market Maker system rather than enhance it, making it unattractive for a firm to commit to providing liquidity.
Comparable Rules
No other Canadian stock exchange requires orders to be given to market makers. CNQ requires certain orders to be given to market makers as it provides the possibility of price improvement and better execution.
APPENDIX �A�
BE IT RESOLVED THAT:
1. Rule 4-107(2) is hereby amended by deleting the word �or� after �Client Matching Order� and by deleting the phrase �after the opening of trading.�
2. Rule 4-107(2) is further amended by adding the following clauses:
�(c) a client or non-client buy order with a limit price equal to or lower than the bid at the time of order entry; and
(d) a client or non-client sell order with a limit price equal to or higher than the ask at the time of order entry.�
PASSED this 9th day of November, 2004, to be effective upon Ontario Securities Commission approval following public notice and comment.
�Ian Bandeen� Chairman
�Timothy Baikie�
Secretary
APPENDIX B
BLACKLINED AGAINST CURRENT RULE,
Rule 4-107 Entry of Orders for Market Maker Securities.
(1) Subject to Rule 4-107(2), only a Designated Market Maker may enter
(a) orders and
(b) crosses at any price between the bid and offer
into the CNQ System for a Market Maker security.
(2) A CNQ Dealer other than a Designated Market Maker may enter into the CNQ System
(a) a Client Matching Order; or
(b) a cross at any price between the bid and ask;
(c) a client or non-client buy order with a limit price equal to or lower than the bid at the time of order entry; and
(d) a client or non-client sell order with a limit price equal to or higher than the ask at the time of order entry
for such securities after the opening of trading.
(3) & (4) - (not applicable, both relate to partially disclosed orders)
(5) CNQ Dealers other than a Designated Market Maker shall, subject to Rules 4-107(2) and (6), direct orders to one or more Designated Market Makers.
(6) A CNQ Dealer may direct part or all of a Client Matching Order to a Market Maker for execution or entry into the CNQ System, including any unfilled portion of the order previously directly entered into the CNQ System by the CNQ Dealer pursuant to Rule 4-107(2).
