NIN 2000/33 - Republication for Comment of Proposed National Instrument 21-101 and Proposed National Instrument 23-101 and Related Documents Marketplace Operation Rule and Trading Rules [NIN - Rescinded]

The Canadian Securities Administrators (“CSA”) are republishing for comment two proposed national instruments and related documents. These regulatory instruments, collectively referred to as the “ATS Proposal”, are part of a CSA initiative to create a framework that permits competitive operation of traditional exchanges and Alternative Trading Systems (“ATSs”) while ensuring that trading is fair and transparent. The proposed documents are

• ·proposed National Instrument 21-101 Marketplace Operation (“the “Marketplace Instrument”), Companion Policy 21-101CP (the “Marketplace Policy”), Forms 21-101F1, 21-101F2, 21-101F3 and 21-101F4 and new Form 12-101F5 (the “Marketplace Forms”), and

• ·proposed National Instrument 23-101 Trading Rules (the “Trading Rules”) and proposed Companion Policy 23-101 (the “Trading Rules Policy”).

The CSA are also distributing to interested parties a request for proposal (“RFP”) for the establishment of a data consolidator to receive and collect quotation and transaction information from each marketplace and to disseminate consolidated information to market data vendors, news services and other customers. The RFP can also be viewed on the Commission’s website at www.bcsc.bc.ca and on the websites of other CSA jurisdictions.

The CSA have been discussing the issue of ATSs for many years. The discussions have focussed on the impact of ATSs on the markets (fragmentation) and how to regulate them. The ATS Proposal sets out a scheme for regulating ATSs by giving them a choice of how they are to be regulated. An ATS can choose to be either an exchange, a member of an exchange or a dealer with additional requirements. The ATS Proposal attempts to minimize fragmentation by setting out order and trade reporting requirements, information consolidation requirements and market integration requirements. In addition, the ATS Proposal is designed not only to maintain market integrity but also to improve it through the Trading Rules.

Thus, the regulatory objectives of the ATS Proposal are as follows: to provide investor choice, improved price discovery and less expensive execution costs.

A. Summary of proposed national instruments and related documents

Marketplace Operation

The Marketplace Instrument would regulate all marketplaces in Canada. Marketplaces include recognized exchanges, recognized quotation and trade reporting systems and ATSs.¹

¹Part 1 of the Marketplace Instrument; Part 2 of Marketplace Policy.

The Marketplace Policy provides guidelines for establishing which types of marketplaces must be recognized as exchanges and which types of marketplaces may be considered as ATSs.²

²Part 3 of Marketplace Policy.

An ATS can seek to be recognized as an exchange, be registered as a dealer and be regulated as a member of an exchange, or be registered as a dealer that is a member of a recognized self-regulatory organization but not a member of an exchange.³

³Section 2.1 of the Marketplace Instrument provides that an ATS is excluded from the Marketplace Instrument if it is a member of a recognized exchange; Section 6.1 of the Marketplace Instrument establishes the regulatory model for ATSs that are not recognized as an exchange or a quotation and trade reporting system and are not members of a recognized exchange.

The Marketplace Instrument sets forth a number of requirements for exchanges and quotation and trade reporting systems, such as reporting and record keeping.⁴

⁴Part 5 of the Marketplace Instrument is only applicable to recognized exchanges and recognized quotation and trade reporting systems.

These requirements exist currently in some jurisdictions. The Marketplace Instrument specifies several new requirements applicable to all marketplaces including information consolidation, market integration, access and systems capacity requirements that reflect the increased importance of technology for these markets.⁵

⁵Part 7 and Parts 9-12 of Marketplace Instrument.

An ATS that is not recognized as an exchange and is not a member of an exchange must be registered as a dealer and will be subject to the additional requirements set out in the Marketplace Instrument.⁶

⁶Part 6 and Parts 9-14 of Marketplace Instrument.

These additional requirements include information consolidation, market integration, clearing and settlement, reporting and record keeping.

The CSA have separated the equity and fixed income markets for purposes of market consolidation and market regulation. This separation reflects the historical differences between the fixed income market and the equity market. For the most part, equity and preferred securities have been listed and traded through central auction markets, while fixed income securities have traded in dealer markets. As a result, the CSA propose that there be different processes for providing order and trade information⁷

⁷Part 8 of Marketplace Instrument; Section 6.3 of Trading Rules.

, different data consolidators, and different entities to perform the market regulation function for fixed income securities. The specific provisions of the instruments concerning the fixed income market are discussed in more detail in Part E.

The Marketplace Forms are required to be filed by marketplaces before commencing to carry on business and must be filed by an ATS to report on certain activities and when ceasing to carry on business. In addition, a person or company that would like to act as the information processor for fixed income securities must file a form. When changes to the information contained on the forms occur, the marketplaces or information processor must file amendments to the forms and exhibits to those forms.

Trading Rules

The Trading Rules and Trading Rules Policy set out common trading rules that will apply to trading on all marketplaces.⁸

⁸The Trading Rules deal with the following items: Part 2 deals with Manipulation and Fraud; Part 3 deals with Short Selling; Part 4 deals with Front Running and Insider Trading; Part 5 deals with Best Execution; Part 6 deals with Display Requirements; Part 7 deals with Principal Trading.

Individual marketplaces may implement additional rules.

Currently, each of the established recognized exchanges has implemented trading rules that are designed to establish fair and equitable trade practices and to prevent abusive and manipulative trade practices. If ATSs are to be allowed to operate independently of recognized marketplaces, they must also follow similar trade practices for their marketplace participants. In order to ensure that ATSs are not used to avoid rules regarding the integrity of the capital markets, it is necessary for the CSA to establish basic common trading rules that will apply across all marketplaces.

In addition, the CSA have added display requirements for dealers who act as market makers to provide quote and trade information.⁹

⁹Part 6 of Trading Rules; Part 7 of Trading Rules Policy.

A market maker is defined in the Trading Rules as “any dealer that holds itself out as being willing to buy and sell a security for its own account on a regular or continuous basis”. The new display requirement replaces the cross-interference rule provision contained in the 1999 proposal and improves transparency in securities that are substantially traded in dealer markets. These requirements are applicable to market participants for exchange-traded equity, preferred securities and options as well as market makers for non-exchange-traded equity and preferred securities and fixed income securities. These changes are based upon similar requirements in the United States set out in the Mandatory Quote Rule and the Order Handling Rules. Changes to the instruments concerning the display requirements are discussed in more detail in Part G.

B. Background

On July 2, 1999, the CSA published for comment a prior version of the ATS Proposal and a Discussion paper on a Plan for a Consolidated Canadian Market. Those documents are collectively referred to as the “1999 Proposal”.¹⁰

¹⁰NIN#99/24.

In Québec, the 1999 Proposal was published for comment on August 27, 1999.

During the comment period, which expired on October 1, 1999 in most jurisdictions (and in November 1999 in Québec), submissions were received from eighteen commenters. The names of the commenters providing the submissions, a summary of their comments and the response of the CSA are contained in Appendix A to this Notice. The CSA thank all commenters. The CSA have made some key changes to the 1999 Proposal in response to some of the comments.

C. Data Consolidator

As described in the 1999 Proposal, the data consolidator will receive and collect quotation and transaction information from each marketplace. The data consolidator will also disseminate consolidated information to market data vendors, news services and other customers. There has been some debate regarding whether broker ID numbers should be collected and disseminated by the data consolidator. The CSA are considering excluding the collection and dissemination of broker ID numbers by the data consolidator.

Question 1: Should broker ID numbers be collected and disseminated by the data consolidator? If yes, should the customer decide whether the broker ID is disseminated?

It was proposed in the 1999 Proposal that the data consolidator be operated by a third party facilitator chosen by the CSA from respondents to the RFP. The RFP will describe the functional and operational requirements for the data consolidator.

Some commenters expressed the view that the development and implementation of the data consolidator should be achieved through participation by industry-wide consultations rather than by the issuance of a RFP to a third party.

After considering the comments, the CSA are of the view that there is a clear need for a data consolidator in the new regime and there will be issues of consolidation and coordination if certain requirements are not specified in a RFP. The CSA are of the view that mandating certain requirements and retaining control of the process is necessary in order to ensure that the data consolidator is established quickly and efficiently.

At this time, the CSA are distributing copies of the RFP to interested parties. A copy of the RFP is located on the websites of the Alberta Securities Commission, British Columbia Securities Commission, Ontario Securities Commission and the Commission des valeurs mobilières du Québec.


D. Market Regulation

The CSA are proposing to deal with market regulation in both the equity market and the debt market. At this time, it is not intended that the equity market and the debt market will have the same market regulator.

Equity Market

In the 1999 Proposal, it was proposed that market regulation would be provided by an “approved agent”. The CSA indicated that all exchanges in Canada were “approved agents”.

The realignment and the demutualization of the exchanges have raised a number of regulatory issues, including market regulation issues. A number of commenters raised concerns about conflicts of interest if an ATS is required to have its market regulation performed by an exchange with which it competes for order flow. This conflict could be avoided if an independent SRO were established to perform market regulation of ATSs. However, it is not clear that ATSs could, at least initially, support the cost of establishing and operating a separate market regulator.

Another possibility would be to consolidate in an independent SRO the responsibility for market regulation for all exchanges and ATSs. This has been opposed by exchanges on the grounds that they would lose control over a function that is important to their market integrity and competitive “brand name”.

A suggested compromise has been for the exchanges to move market regulation into separate divisions or subsidiaries that would be insulated from the parts of the exchange that compete with ATSs.

Question 2: Who should provide market regulation for ATSs? Please provide reasons for your answer.

The CSA are publishing the current ATS Proposal without taking a position on how market regulation should be organized for the equity market. Industry participants should consider and discuss possible solutions. The CSA are willing to participate in discussions but is looking to the industry to propose alternatives for market regulation in the equity market.

Debt Market

The CSA are considering who would be the appropriate entity to perform market regulation for the debt market. At present, the Investment Dealers Association of Canada (the “IDA”) is conducting market regulation of the debt market for IDA member firms. The CSA are considering whether it is appropriate for the IDA to assume the role of market regulator for the entire debt market.

Question 3: Is it appropriate for the IDA to assume the role of market regulator for all participants in the debt market?

E. Fixed Income Market - Reporting Requirements, Data Consolidation and Market Regulation

General

The CSA recognize that currently there are significant differences between domestic debt and equity markets. For example, equity markets are typically markets where prices are determined through the interaction of purchases and sales by investors through an auction process. Debt markets, on the other hand, have historically been principal markets in which prices are determined by market makers through the interaction of buy and sell orders communicated by these dealers. Although there have been recent developments where electronic order matching has been used to trade bonds, the market maker model remains common today. As a result, the 1999 Proposal has been adapted to reflect the distinction between the fixed income market and the equity market.

The CSA believe that it is important to improve transparency of the domestic debt markets. In an effort to improve transparency, the 1999 Proposal has been adapted to require that inter-dealer bond brokers, marketplaces trading debt securities and market makers trading debt securities provide both pre-trade and post-trade information. In addition, the CSA are considering who will be the data consolidator for the fixed income market and who will perform the market regulation function.

Inter-dealer bond broker is defined as the organizations listed in Appendix A of the Marketplace Instrument. These inter-dealer bond brokers are currently operating in Canada. Other inter-dealer bond brokers may apply to the CSA and request that they be added to the list in Appendix A.

Pre-Trade Transparency

For pre-trade transparency, the CSA propose that inter-dealer bond brokers be required to provide information for each debt security (corporate debt and government debt) traded by the inter-dealer bond broker as required by the information processor.¹¹

¹¹Part 8 of Marketplace Instrument.

The CSA recognize that the number of issues will vary according to each inter-dealer bond broker. Marketplaces trading debt securities will be required to provide information for each debt security traded on the marketplace as required by the information processor.¹²

¹²Part 8 of Marketplace Instrument.

It is expected that information provided by inter-dealer bond brokers and marketplaces will be provided in real time.

Market makers are required to provide the ask price, bid price and size of each market maker order as well as the ask price, bid price and size of each customer limit order that improves the ask or bid price of the market maker’s order.¹³

¹³Section 6.3 Trading Rules Policy.

Initially, it is expected that market maker pre-trade information will be provided on an end of day basis. It is expected that within one year, this information will be provided in real time.

Question 4: Should there be an exemption from the display requirement for debt securities based on the value of the order or some other criteria? If so what should the criteria be?

Question 5: Is the definition of market maker appropriate?

Question 6: Should requirements imposed on market makers to provide pre-trade information for the debt market be implemented on a gradual basis? What information should be provided? When should this information be provided initially? If information is provided on an end of day basis, what time is appropriate? Is it appropriate to require this information be provided in real time in one year?

Question 7: Should information only be required on a pre-trade basis for the most liquid debt securities or based on some other criteria? How should “most liquid” debt securities be defined? What information should be provided?

Post-Trade Transparency

For post-trade transparency, the CSA are proposing that inter-dealer bond brokers and marketplaces be required to provide details of all trades of debt securities.¹⁴

¹⁴Part 8 of Marketplace Instrument.

It is expected that this information will be provided in real time. Market makers are also required to provide details of all trades of debt securities.¹⁵

¹⁵Section 6.3 of Trading Rules Policy.

As above, the CSA are proposing that market maker post-trade information be implemented on a gradual basis. Initially, it is expected that market maker post-trade information will be provided on an end of day basis. It is expected that within one year, this information will be provided in real time.

Question 8: Should requirements imposed on market makers to provide post-trade information for the debt market be implemented on a gradual basis? If so, when should this information be provided initially? If information is provided on an end of day basis, what time is appropriate? Is it appropriate to require this information be provided in real time in one year?

Question 9: Should information only be required on a post-trade basis for the most liquid debt securities? How would “most liquid” debt securities be defined?

The National Association for Securities Dealers (“NASD”) in the United States has released a proposal to establish a corporate bond trade reporting and transaction disseminating facility called the Trade Reporting and Comparison Entry Service (TRACE). The proposed NASD rules require the dissemination of trade report information, including the actual quantity of the corporate bonds traded, except for high yield and un-rated trades over $1 million par value, which will be disseminated as “1MM+”, and investment-grade transactions over $5 million par value, which will be disseminated as “5MM+”. The CSA are considering whether to adopt this approach with respect to the information provided to the information processor.

Question 10: Should the CSA follow a similar approach?

Data Consolidation

The CSA recognize that there could be two separate systems to collect and disseminate order and trade information for the equity market and the debt market. As set out above, the CSA are issuing a RFP for the data consolidator to collect and disseminate order and trade information. At this time, it is expected that the data consolidator will collect and disseminate information for equity securities, preferred securities and options. The CSA have developed the concept of an “information processor” to collect and disseminate order and trade information for the government debt and corporate debt market. This concept was developed to reflect the fact that parties currently operating in a similar capacity could apply without the need for a request for proposal. At the current time, the only entity operating in a similar capacity is the CanPX transparency system (“CanPX”). Currently, CanPX links together feeds from participating inter-dealer bond brokers and sorts for the best bid-offer price and records transactions in real time. If CanPX is not the information processor, the data consolidator will collect and disseminate information for the debt market.

The CSA have established a number of requirements that are applicable to information processors.¹⁶

¹⁶Part 15 of Marketplace Instrument; Part 18 of Marketplace Policy; Form 21-101F5.

First, a person or company that wants to perform the functions of the information processor must file Form 21-101F5. The CSA will review the form to determine if it is contrary to the public interest to have that person or company perform those functions. In addition, an information processor must:

• ·provide prompt, accurate, reliable and fair collection and distribution of information;

• ·not unreasonably prohibit or limit access to services offered by it; and

• ·keep certain books and records.

The purpose of requiring the filing of the form and establishing requirements that apply to information processors is to ensure the availability of prompt and accurate order and trade information, to guarantee fair access to the information and to assess the ongoing viability of the entity.

Question 11: Are there any other requirements that should apply to the information processor?

IDA Regulation 2100 prohibits the inter-dealer bond brokers from dealing with anyone other than IDA members and Canadian chartered banks. This prohibition prevents inter-dealer bond brokers from becoming ATSs. In light of the Marketplace Instrument and developments in the markets, the CSA request comment on whether this prohibition is appropriate.

Question 12: Is Regulation 2100 of the Investment Dealers Association still appropriate

F. Jurisdiction

In the notice accompanying the 1999 Proposal, comment was specifically requested on issues related to both domestic and foreign registration requirements for ATSs. With respect to domestic ATSs, CSA Staff set out their view that if an ATS was registered in one jurisdiction in Canada and only dealt with registered dealers in another jurisdiction in Canada, the ATS need only be subject to the regulatory requirements of the jurisdiction where its head office is located. After considering the comments received, the CSA have revised the proposal.¹⁷

¹⁷Part 14 Marketplace Instrument; Part 17 Marketplace Policy.

Every ATS carrying on business as an ATS in Canada must be registered in at least one local jurisdiction. An ATS is considered to be carrying on business in a local jurisdiction if it provides access to subscribers located in that jurisdiction. However, an ATS is exempt from the requirement to register if that ATS is already registered in a jurisdiction in Canada and provides access only to registered dealers located in the local jurisdiction.

With respect to foreign jurisdictions, CSA Staff requested comment on whether a similar approach to that set out above was appropriate for trading systems that are located and regulated outside of Canada. This would mean that if a foreign ATS dealt only with registered dealers in Canada, then it would only be subject to the regulatory requirements in the foreign jurisdiction where its head office is located. Many comments were received on this point and raised the issue of reciprocity. Commenters suggested that the approach set out above was inappropriate so long as Canadian ATSs do not enjoy similar treatment under foreign regimes.

After considering the comments received, the CSA are adding a provision in the revised proposal to clarify that foreign ATSs must register in at least one jurisdiction in Canada if the ATS is dealing with Canadian investors or dealers registered in Canada.¹⁸

¹⁸Part 14 Marketplace Instrument; Part 17 Marketplace Policy.

Once registered in one jurisdiction in Canada, the regime applicable to domestic ATSs would then apply.

G. Cross Interference Rule- Display Requirements

The 1999 Proposal contained a section dealing with offsetting orders (the “cross interference rule”). The cross interference rule provided that any existing bids or offers in any marketplace be satisfied when a cross occurs.¹⁹

¹⁹It was explained that the CSA considered a cross to be an offsetting order to buy and sell a security entered by a marketplace participant as principal or agent.

In other words, an order of a marketplace participant that is committed to the market (i.e., displayed by the data consolidator) would receive priority. The practice of crossing on the existing bid or offer without satisfying an order with previous standing was prohibited. The purpose of this rule was to encourage market participants to put orders into the book by rewarding those who do so by establishing “time” as the secondary priority rule. The rule applied to all transaction sizes.

Commenters indicated that the cross interference rule would drive the block market in interlisted securities to the United States. After considering the comments received, the CSA have decided to delete the cross interference rule and replace it with display requirements as described below.

The CSA have considered the Mandatory Quote Rule and the Order Handling Obligations in the United States. In general, the rules require market makers to display the price and full size of customer limit orders when these orders represent a buying or selling interest that is at a better price than a market maker’s public quote. After considering these requirements, the CSA are proposing display requirements that apply to marketplace participants trading exchange-traded securities (equity securities, preferred securities and options) and market makers trading non-exchange-traded securities (equity and preferred securities).²⁰

²⁰Part 6 of Trading Rules.

New provisions require marketplace participants to immediately provide to a marketplace in which it is a marketplace participant the ask price, bid price, and size of orders received from customers for exchange-traded securities. There is an exemption provided for equity and preferred securities orders which have a value in excess of $100,000 and options orders over 100 contracts. In excluding these orders, the CSA recognize that the handling of block size orders differs from other orders. For example, dealers often negotiate terms and conditions with respect to block size orders. One of the major objectives in proposing display requirements is to improve the handling and execution opportunities afforded to customers that lack the power to negotiate better terms. Because most investors that trade block size orders have such power, the CSA have chosen not to mandate the display of block size orders.
Question 13: Should there also be an exception based on number of shares traded (in addition to value of shares traded)? Are there any other exceptions to the display requirements that should be included?

Market makers for non-exchange-traded securities are also required to provide information to the data consolidator, unless the order has been submitted to a marketplace.²¹

²¹Part 6 of Trading Rules.

The required information relates to the ask price, bid price and size of the market maker’s orders and customer limit orders that would improve the ask or bid price of the market maker’s orders. A customer limit order is defined as an order to buy or sell a security at a specified price that is not for the account of either a broker or a dealer. The CSA are of the view that displaying customer limit orders that improve the bid or offer of the market maker’s orders increases quote competition which, in turn, improves price discovery. As described above, there is an exception provided for orders for non-exchange-traded equity or preferred securities in excess of $100,000 in recognition of the fact that block size orders differ from other orders.

Question 14: Should the requirement regarding customer limit orders apply to the fixed income market?

Question 15: Should there be an exemption based on the value of the order or some other criteria for fixed income securities?

The CSA believe that adopting display requirements that apply to marketplace participants and market makers will promote transparency and enhance execution opportunities for customer orders and encourage liquidity. The CSA believe that the display requirements appropriately establish a presumption that orders should be displayed unless the orders are of block size.

H. Audit Trail Requirements

Part 11 of the Marketplace Instrument imposes record keeping requirements onto marketplaces. These requirements require a marketplace, among other things, to keep records of certain information related to orders and trades. Marketplaces that are ATSs must transmit this information to an approved agent.

Part 11 of the Marketplace Instrument also requires that the marketplace or approved agent synchronize the clock it uses for recording or monitoring the time and date of any event to the clock used by the data consolidator (for equity or preferred securities or options) or to the clock used by the information processor (for debt securities).

Part 11 of the Trading Rules sets record keeping requirements regarding orders and trades that are applicable to dealers. The CSA believe that it is particularly important to have such requirements for transactions that are not traded through a marketplace. The CSA believe that it is necessary to establish requirements to ensure that there are effective surveillance and examination capabilities. In this regard, the CSA have considered various NASD requirements, including the NASD Order Audit Trail System (OATS). OATS imposes obligations on NASD member firms to record in electronic form and to report certain items of information with respect to orders they receive to effect transactions in equity and preferred securities traded in Nasdaq. NASD-R combines this information with transaction data currently reported by members through Nasdaq to construct an integrated audit trail of quotation, transaction and order data.

Question 16: Should special order audit trail requirements be adopted? Under what circumstances should the CSA impose these types of requirements? To whom should the requirements apply? What additional information should be collected?

Question 17: Should the audit trail requirements be established by the CSA or should the exchange, approved agent or the IDA determine the requirements?

Part 11 of the Trading Rules also requires clock synchronization. Dealers must synchronize their clocks to those of the marketplace where the order is executed, if the marketplace is an exchange, the approved agent of the ATS, if the order is executed on an ATS, or an approved agent, if the order is not executed through a marketplace.


I. The Reported Market

There have been requirements for reporting transactions in unlisted securities trading over-the-counter in Ontario since 1970. At that time, the Ontario Securities Commission (“OSC”) recognized the IDA as the agency for receiving, assembling and publishing the over-the-counter trading data. The reporting of trades then moved to the OSC in the form of the Canadian Over-the-Counter Automated Trading System (“COATS”) and finally to the Canadian Dealing Network (“CDN”), a subsidiary of the TSE. Although essentially a mechanism for fulfilling the reporting obligations under securities legislation, this operation is referred to as the reported market.

Since 1970, the reporting requirement has been expanded. Originally, the OSC required transactions to be reported for designated unlisted industrial stocks traded over-the-counter. In 1971, the OSC added mining stocks and oil stocks to the reporting systems. Over time, the requirement has been expanded to require reporting of trades in all equity securities (except for those already reported through an exchange or quotation system). The requirement is set out in sections 128 and 154 of the regulations made under the Securities Act (Ontario). Sections 128 and 154 require reporting by all dealers. This overlaps with the reporting requirements in the Trading Rules for market makers to display quote and trade information. This issue is also being discussed as part of the exchange restructuring regarding what should happen to the CDN reported market. The OSC is proposing to repeal sections 128 and 152-157 and to replace them with a reporting requirement for all trades not otherwise reported under the Proposed Marketplace Rule or Trading Rules. No information will be displayed unless a market maker has been involved. The trades would be reviewed for purposes of compliance with the Trading Rules. These dealer reporting requirements are proposed in OSC Rule 23-502 The Reported Market published by the OSC concurrently with this notice.

Question 18: Should the display requirements for over-the-counter orders or trades be expanded from market makers to all dealers?

Question 19: Should the information be sent to the data consolidator or another party

J. Implementation of the ATS Proposal

In order to facilitate implementation of the ATS Proposal, the CSA may separate and implement parts of the ATS Proposal that do not require material changes from those parts that need to be amended as a result of the comments received. For example, the CSA may consider splitting the ATS Proposal into two separate proposals, one for the equity market (the “equity proposal”) and one for the fixed income market (the “fixed income proposal”), and may implement the equity proposal before finalizing the fixed income proposal.


K. Technical Changes made to 1999 Proposal

This section of the Notice discusses various technical changes made to the 1999 Proposal.

The Concept of Marketplace

The definition of “marketplace” has been amended to include a “dealer” if that dealer brings together orders for “exchange-traded securities” and is not a marketplace participant.²²

²²Part 1 of Marketplace Instrument.

This change reflects comments received that a dealer system that uses a modicum of discretion (for example, a trader reviewing incoming orders to determine which orders he or she wants to trade as principal against) would not be included in the definition of “marketplace”. Without this change, it is possible that dealers who are not marketplace participants could internalize order flow and not provide their orders for purposes of transparency.

Definition of “ATS security”

The definition of “ATS security” has been deleted. This change has been made in response to comments that dealers today are not restricted from trading unlisted securities or from handling orders received for foreign securities. The definition would have placed a limitation on the business of an ATS that is currently available to dealers. As an alternative to the definition of “ATS security”, the CSA are proposing that an ATS that is trading unlisted securities or foreign securities be required to provide risk disclosure to its subscribers.²³

²³Section 6.8 of Marketplace Instrument.

The CSA will monitor the situation to determine whether this adequately addresses the issue of ATSs trading unlisted securities or foreign securities.

Volume Thresholds

The volume thresholds that could cause the members of the CSA to determine that a marketplace should be recognized as an exchange have been reduced from the 1999 Proposal. The first volume threshold in the 1999 Proposal has been reduced from 40 percent to 20 percent.²⁴

²⁴Section 6.5 Marketplace Instrument; Section 3.1 Marketplace Policy.

As a result, if for three out of the preceding four calendar quarters, the average daily dollar value of the trading volume on the ATS for a calendar quarter in a type of security is equal to or greater than 20 percent of the average daily dollar value of the trading volume for that calendar quarter in that type of security traded in Canada, then by virtue of the level of trading on the system, and the importance of ensuring that access is provided to all investors, the CSA will consider whether the system should be considered to be an exchange and therefore regulated as an exchange. The CSA have deleted the second volume threshold contemplated in the 1999 Proposal that would have applied if the volume of trading activity reached 50 percent of the average daily dollar value of the trading volume in any security and 5 percent of the average daily dollar value of the trading volume in any type of security traded in Canada. The CSA are of the view that, in considering whether a system should be regulated as an exchange, it is more appropriate to refer to the level of trading in a segment of the securities market than to refer to the level of trading in a particular security in combination with a lower level of trading in a segment of the securities market.

In addition, section 6.5 of the Marketplace Instrument has been amended to provide that an ATS notify the appropriate member of the CSA when the volume thresholds are reached only in respect of securities traded in Canada. Commenters indicated that it might not be feasible for an ATS to calculate the threshold with respect to trading on marketplaces outside of Canada.

Prohibition Against Principal Trading

The section prohibiting principal trading by a person or company that operates an ATS has been deleted. This change reflects comments that the restriction would not be effective in achieving the stated objective. The CSA proposed this restriction to prevent dealers with large volumes of trading from withdrawing from exchanges and operating as ATSs. Commenters indicated that this restriction would not prevent a third party from offering dealers a system to internalize their order flow.

Disclosure of Transaction Fees

The section concerning transaction fees has been amended to provide that each marketplace is required to publicly post with the data consolidator a schedule of all trading fees that is applicable to outside users that are executing a trade by accessing an order displayed through the data consolidator.²⁵

²⁵Part 10 Marketplace Instrument.

This change reflects comments that opposed the disclosure of transaction fees in orders displayed by the data consolidator. A section has been added to the companion policy to clarify that it is not the intention of the CSA that a commission fee charged by a dealer be disclosed to the data consolidator.²⁶

²⁶Part 13 Marketplace Policy.

This change responds to comments seeking clarification if the provision concerning disclosure of transaction fees was intended to refer to commission fees, which are negotiated fees that may vary depending upon the client or in the circumstances.

Capacity, Integrity and Security of Marketplace Systems

In the 1999 Proposal, it had been proposed that all systems capacity, integrity and security requirements would apply to an ATS once trades on an ATS reached a 20% threshold but would not apply below the threshold. The CSA are of the view that certain basic systems capacity, integrity and security standards should apply to all ATSs as well as recognized exchanges and recognized quotation and trade reporting systems. Section 12.1 of the Marketplace Instrument has been amended to require an ATS to meet certain systems capacity, integrity and security standards (set out in section 12.1(a) through (e) of the Marketplace Instrument). Additional systems capacity, integrity and security standards (set out in section 12.2(f) and (g) of the Marketplace Instrument) will apply to an ATS that has exceeded the 20 percent threshold set out in section 12.2 of the Marketplace Instrument as well as all recognized exchanges and recognized quotation and trade reporting systems.

Capping and Pegging

The section in the 1999 Proposal concerning capping and pegging has been deleted. This change reflects comments received that the rule could severely hamper liquidity in the options market. Rather than adopt a separate “capping and pegging” prohibition, section 2.1(4) 9 of the Trading Rules Policy has been added to include any manipulative trading activity designed to increase the value of a derivative position.

Short Selling

The section on short selling has been amended. In the 1999 Proposal, the CSA proposed a zero-plus tick rule. As result of comments received, the CSA have amended the short sale rule to provide for a zero-tick rule, i.e., a short sale may be made at a price higher than the last sale price or at the same price as the last sale price regardless of whether the last sale price was a zero-plus tick or a zero-minus tick.²⁷

²⁷Part 3 Trading Rules; Part 3 Trading Rules Policy.

The CSA consider that the framework rules provide certain minimum standards and that, if an exchange considers it appropriate, it may implement a higher standard.
Question 20: Should short selling provisions be limited to trades facilitated on a marketplace or should they apply to dealers trading outside of a marketplace?

Regulatory Halts

Section 8.1 of the Trading Rules is new and provides that if a securities regulatory authority, a recognized exchange or a recognized quotation and trade reporting system makes a decision to prohibit trading in a particular security, no marketplace shall permit trading in that security during the period the prohibition is in effect.

Trading After Hours

Subsection 9.1 of the Trading Rules is new and provides that each marketplace shall set requirements in respect of the hours of trading to be observed by the marketplace participants. The CSA agree with comments received that an ATS should be permitted to engage in after-hours trading outside of the closing bid-ask of the principal market.


L. Specific Requests for Comment

In summary, the CSA request comments on the following issues:

Question 1:

Should broker ID numbers be collected and disseminated by the data consolidator? If yes, should the customer decide whether the broker ID is disseminated?

Question 2:

Who should provide market regulation for ATSs? Please provide reasons for your answer.

Question 3:

Is it appropriate for the IDA to assume the role of market regulator for all participants in the debt market?

Question 4:

Should there be an exemption from the display requirement for debt securities based on the value of the order or some other criteria? If so what should the criteria be?

Question 5:

Is the definition of market maker appropriate?

Question 6:

Should requirements imposed on market makers to provide pre-trade information for the debt market be implemented on a gradual basis? What information should be provided? When should this information be provided initially? If information is provided on an end of day basis, what time is appropriate? Is it appropriate to require this information be provided in real time in one year?

Question 7:

Should information only be required on a pre-trade basis for the most liquid debt securities or based on some other criteria? How should “most liquid” debt securities be defined? What information should be provided?

Question 8:

Should requirements imposed on market makers to provide post-trade information for the debt market be implemented on a gradual basis? If so, when should this information be provided initially? If information is provided on an end of day basis, what time is appropriate? Is it appropriate to require this information be provided in real time in one year?

Question 9:

Should information only be required on a post-trade basis for the most liquid debt securities? How would “most liquid” debt securities be defined?

Question 10:

Should the CSA follow a similar approach?

Question 11:

Are there any other requirements that should apply to the information processor?

Question 12:

Is Regulation 2100 of the Investment Dealers Association still appropriate?

Question 13:

Should there also be an exception based on number of shares traded (in addition to value of shares traded)? Are there any other exceptions to the display requirements that should be included?

Question 14:

Should the requirement regarding customer limit orders apply to the fixed income market?

Question 15:

Should there be an exemption based on the value of the order or some other criteria for fixed income securities?

Question 16:

Should special order audit trail requirements be adopted? Under what circumstances should the requirements be imposed? To whom should the requirements apply? What additional information should be collected?

Question 17:

Should the audit trail requirements be established by the CSA or should the requirements be determined by the exchange, approved agent or the IDA?

Question 18:

Should the display requirements for over-the-counter orders or trades be expanded from market makers to all dealers?

Question 19:

Should the information be sent to the data consolidator or another party?

Question 20:

Should short selling provisions be limited to trades facilitated on a marketplace or should they apply to dealers trading outside of a marketplace?

Anticipated Costs and Benefits

The Marketplace Instrument allows ATSs to compete with traditional markets, such as exchanges. When an environment is established that allows for competition among markets, then investors will have choices. The CSA are of the view that allowing such competition will stimulate innovation and encourage markets to offer better features and services to their members and subscribers and at lower costs.

The Marketplace Instrument also provides improved market transparency for all marketplaces as well as interlinkage of those marketplaces so that all buyers and sellers of a security have access to the best price for execution.

The requirements regarding systems capacity, integrity and security of systems provide several benefits to the marketplace and to investors. Marketplaces are increasingly reliant on technology and most of their functions are becoming highly automated. The ability of marketplaces to provide more reliable and consistent service in the market benefits investors and the markets.

The Marketplace Instrument imposes costs on ATSs, exchanges and quotation and trade reporting systems as a result of the requirements imposed by the Marketplace Instrument, including application procedures, access requirements, the requirement to adopt certain by-laws and rules, the requirements relating to pre-trade and post-trade transparency and market integration, and the requirements relating to capacity, integrity
and security of systems. In particular, the notice, reporting and record keeping requirements will require marketplaces to file certain additional information. The requirements relating to capacity, integrity and security will also impose costs. However, smaller ATSs will not be subject to the requirements relating to capacity, integrity and security of systems.

In the view of the CSA, the benefits outweigh the costs.

The Trading Rules benefit purchasers and sellers of securities in that they are designed to prohibit certain practices and to require other practices, all of which are necessary for the operation of fair and efficient capital markets. The Trading Rules impose compliance costs on persons or companies subject to the Trading Rules in that it prohibits certain activities. It also imposes costs on marketplace participants in terms of the best execution rules and the rules restricting principal trading. It also requires marketplaces to monitor and enforce compliance with certain of the provisions of the Trading Rules. In the view of the CSA, the benefits of the Trading Rules outweigh the costs.


Comments

Interested parties are invited to make written submissions with respect to the Marketplace Instrument, Marketplace Policy, Marketplace Forms, Trading Rules and Trading Rules Policy. Submissions received by September 30, 2000 will be considered.

Submissions should be sent to all of the CSA listed below in care of the OSC, in duplicate, as indicated below:

British Columbia Securities Commission
Alberta Securities Commission
Saskatchewan Securities Commission
The Manitoba Securities Commission
Ontario Securities Commission
Office of the Administrator, New Brunswick
Registrar of Securities, Prince Edward Island
Nova Scotia Securities Commission
Securities Commission of Newfoundland
Registrar of Securities, Northwest Territories
Registrar of Securities, Yukon Territory
Registrar of Securities, Nunavut

c/o John Stevenson, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 1903, Box 55
Toronto, Ontario M5H 3S8
jstevenson@osc.gov.on.ca

Submissions should also be addressed to the Commission des valeurs mobilières du Québec as follows:

Claude St. Pierre, Secretary
Commission des valeurs mobilières du Québec
800 Victoria Square
Stock Exchange Tower
P.O. Box 246, 22nd Floor
Montréal, Québec H4Z 1G3
claude.stpierre@cvmq.com

A diskette containing the submissions (in DOS or Windows format, preferably WordPerfect) should also be submitted. As securities legislation in certain provinces requires that a summary of written comments received during the comment period be published, confidentiality of submissions cannot be maintained.

Questions may be referred to any of:

Louyse Gauvin
Special Advisor to the Chair
British Columbia Securities Commission
(604) 899-6538 or (800) 373-6393 (in B.C.)

Ross McLennan
Director, Registration
British Columbia Securities Commission
(604) 899-6685 or (800) 373-6393 (in B.C.)

Eric Spink
Vice-Chair
Alberta Securities Commission
(780) 422-1503

Glenda Campbell
Vice-Chair
Alberta Securities Commission
(403) 297-4230

Barbara Shourounis
Director of the Securities Commission
Saskatchewan Securities Commission
(306) 787-5842

Doug Brown
Counsel
Manitoba Securities Commission
(204) 945-0605

Randee Pavalow
Manager, Market Regulation
Ontario Securities Commission
(416) 593-8257

Susan Greenglass
Legal Counsel, Market Regulation
Ontario Securities Commission

Tracey Stern
Legal Counsel, Market Regulation
Ontario Securities Commission
(416) 593-8167

Diane Joly
Director, Research and Market Development
Commission des valeurs mobilières du Québec
(514) 940-2199, ext. 4551

DATED at Vancouver, British Columbia, on July 26, 2000.


Joyce C. Maykut, Q.C.
Vice Chair

Ref: NIN#99/24
Sections 128, 152-157, Regulations to Securities Act (Ontario)
OSC Rule 23-502

This NIN refers to other documents. These documents may be found at the B.C. Securities Commission public website at www.bcsc.bc.ca in the Policy Documents database or the Historical Documents database.

1. The Toronto Stock Exchange

2. Canadian Depository for Securities

3. Vancouver Stock Exchange

4. Joint Exchange - ASE, ME, TSE, VSE

5. Bloomberg

6. Institutional Equity Traders Association

7. Goepel McDermid Securities

8. Instinet Canada Ltd.

9. Investment Dealers Association of Canada- Equity Trading Committee

10. Bank of Canada

11. Versus Technologies Inc.

12. CIBC World Markets

13. Nesbitt Burns

14. Bunting Warburg Dillion Read Inc.

15. TraderDirect

16. Investors Group

17. Investment Dealers Association of Canada- Capital Markets Committee

18. Ontario Teachers’ Pension Plan Board

SUMMARY OF COMMENTS AND CSA RESPONSES
A. NATIONAL INSTRUMENT 21-101 MARKETPLACE OPERATION
1. Regulatory choice	TSE- It would be simpler and more effective to provide ATSs with two alternatives: join an exchange or register as an exchange. The fact that ATSs will not be required to join an SRO that performs market regulation means that, unlike the case in the US, ATSs will be subject only to the CSA’s framework trading rules. Any concerns that the CSA may have about anti-competitive activities by the exchanges can be addressed through the Commissions’ oversight powers. ATSs that do not want to be regulated by an entity that they view to be a competitor could become exchanges or establish their own market regulation SRO and have that recognized by the CSA. Joint Exchanges- The tripartite regime whereby ATSs would not be required to join an SRO threatens current standards of market regulation. It is recommended that ATSs be required to join an exchange or register as an exchange. Investors’ Group- Given that regulation as an exchange may not be feasible for an ATS in light of the significant costs involved and other considerations, membership in an exchange or the IDA may be the only viable alternative for many ATSs. This may raise concerns from a conflict of interest perspective. As a result, any regulatory system established for ATSs should address this by either: (1) ensuring that regulation as an exchange is a viable and economic option; (2) requiring that membership categories and rules established by exchanges or the IDA are reasonable and designed to foster competition and not act as a barrier to entry. VSE- A tripartite regime will result in fragmentation of market regulation which will negatively affect the integrity of the Canadian market. It is recommended that, as in the US, ATSs should operate either as a member of an exchange or as an exchange. Existing commission oversight and the appeal process should deal with any real or perceived conflicts of interest that might arise. ATSs that do not consider this adequate protection would be able to register as an exchange. Versus- The choice of regulatory alternatives is essential if ATSs are to be able to conduct business in Canada on a competitive basis. If ATSs were forced into exchange membership, the result would be that the Canadian marketplace would retain its status quo. The ATS would be forced to seek permission from the exchange each time it sought to introduce a new competitive service. Response: The choice of regulatory alternatives is necessary if ATSs are to conduct business in Canada on a competitive basis. There is concern that conflicts of interest might arise if ATSs were required to become members of exchanges.
2.Definition of “Marketplace” (National Instrument 21-101, Part 1)	TSE- One concern is with the wording of the definition to exclude dealers’ internal systems to trade and manage order flow. The exception as drafted leaves open the possibility that a dealer system that uses a modicum of discretion would not be caught by the definition. This would allow dealers that are not exchange members to internalize order flow because they would not be matching these orders on a marketplace. This is of particular concern given that such a dealer would not be a “marketplace participant” and would therefore not be subject to the framework trading rules (other than the anti-manipulation rule). Instinet- A broker that elects to trade as principal and commit capital to its trading activities escapes regulation as an ATS and will never be regulated as an exchange no matter how large its volume is. Further, the boundary between an ATS and a “traditional dealer” is made to depend on the degree to which “non-discretionary methods” are employed for orders to interact. Where a technologically advanced trading operation affords its users a variety of discretionary methods for trading, it does not seem appropriate to treat that entity as a marketplace. TraderDirect- Would the following situations be considered marketplaces: (1) A system whereby multiple dealers are queried by a customer for a price, the dealers respond with quotes, and the customer then executes the trade with whichever dealer the customer chooses; and (2) A system whereby multiple dealers post executable prices to an auction screen, buy-side customers can execute against those prices for the volumes show, up to a maximum volume, buy-side customers cannot post prices and trades may by anonymous on the screen but there are credit checks built-in. Bank of Canada- The definition of marketplace effectively excludes traditional dealer (to client) trading activity from the marketplace concept. However, interdealer bond brokers (IDBs) will, under this definition, be considered marketplaces. This implies that the IDB marketplace participants are the dealers since they are the only entities that have access to IDBs. Response: Currently, the definition of “marketplace” contains a gap with respect to dealers. The intention is to have dealers trading exchange-traded securities participate for purposes of transparency and market integration. The definition of “marketplace” has been amended to ensure that dealers are not excluded. The result would be that a dealer would be considered to be a marketplace if that dealer was not a member of an exchange, a user of a quotation and trade reporting system, or a subscriber of an ATS. With respect to the fixed income market, the CSA have excluded IDBs from the definition of marketplace. However, IDBs must provide information for purposes of transparency.
3. Recognized quotation and trade reporting system	TraderDirect- Will IDBs have to register as recognized quotation and trade reporting systems?

	Response: This issue has been addressed in the response concerning the definition of a “marketplace”.
4. Definition of “ATS” (National Instrument 21-101, Part 1)	TSE- The wording of the policy leaves open the possibility that ATSs could offer a market making function as it is limited to ATSs that offer “guaranteed minimum size” orders. The restriction appears to be based on the minimum guaranteed fill provided by market makers on the TSE and the ME pursuant to which small, tradeable client orders are guaranteed a complete fill at the bid and offer even if there is not sufficient size in the book to fill the order. A guaranteed fill is not an integral feature of a market making system. Rather than focus on guaranteed fills, the rule should focus on the essential role of a market maker, which is to guarantee a two-sided market for a security on a reasonably continuous basis. Versus- Versus concurs with the provision requiring the ATS to be regulated as an exchange if it offers certain services that have been traditionally recognized as the service of an exchange (eg., listing). If these services are offered by the ATS, the ATS is an exchange and should be regulated as an exchange. Response: The market making function in the definition of ATS will be amended to refer to the guarantee of a two-sided market for a security on a reasonably continuous basis.
5. Definition of “ATS security” (National Instrument 21-101, Part 1)Question 4: Should trading of securities be limited to securities that are listed on a recognized exchange?	TSE- Dealers today can trade foreign unlisted securities provided they comply with the trade reporting and quotation rules of CDN- so should ATSs. VSE- ATSs should be restricted from trading unlisted securities, especially junior securities. Post restructuring, ATSs should have to comply with CDNX’s reported market rules. Goepel McDermid Securities- ATSs should be limited to reporting issuers whose securities are listed on a recognized exchange. The main reason being that we must maintain a high level of confidence in Canadian markets and to allow the trading of “non exchange listed” issues could potentially lead to abusive practices- a broker/dealer who is not an exchange member might seek to establish a CSA sanctioned ATS which could perhaps lend an air of legitimacy to this section of the Canadian capital marketplace. Bloomberg- Currently, a Canadian investor can ask its broker to buy or sell securities that are trading in any foreign market. The definition of “ATS security” should not be limited to securities that are listed on a recognized exchange or circumscribed by reference to specific foreign markets. TraderDirect- Does the definition mean that the ATS cannot bring together purchasers and sellers of other types of products (eg. foreign exchange products)? Can the ATS operate a parallel system that trades in other types of products? What is the definition of system? What would be the licensing scheme? Would an IDB have to have two licenses?
	Investor’s Group- Trading securities of reporting issuers on an ATS should not be limited to securities that are listed on a recognized exchange. Instinet- Trading of securities of reporting issuers on an ATS should not be limited to securities that are listed on a recognized exchange. Limiting securities that can be traded on an ATS to exchange traded securities is too restrictive and imposes on ATSs an additional “stock exchange function”. Versus- Versus does not concur that ATSs should be restricted in the securities that can be lawfully traded by them. Under its registration as a broker, Versus is not restricted from trading qualified OTC securities on behalf of its clients, or from handling orders received for foreign securities that fall outside the definition of “ATS security”. The introduction of this restriction would place a limitation on business currently within the scope of Versus, without apparent justification, placing it at a competitive disadvantage to other Canadian registered brokers and foreign ATS carrying on business in Canada. Ontario Teachers’ Pension Board- The definition of “ATS security” is broad enough. Response: Currently, there is a gap in the definition of “ATS security” for systems trading products not identified (e.g., foreign debt). The definition of “ATS security” will be eliminated. The definition would have placed a limitation on the business of an ATS that is currently available to dealers. As an alternative to the definition of “ATS security”, an ATS that is trading unlisted securities or foreign securities will be required to provide risk disclosure to its subscribers which will advise that securities are not necessarily securities of reporting issuers in Canada and there is no guarantee of the quality or availability of information on the issuer or any other information.
6. Foreign Markets(Appendix A to National Instrument 21-101)Question 5: Which foreign markets should be included in the Appendix to the Instrument?	Bloomberg- If the CSA feels that it must prescribe markets, Bloomberg would urge including, at a minimum, the markets located in the G7 nations. Investor’s Group- ATSs should not be restricted to trading in securities on the four foreign markets listed in Appendix A. All foreign markets should be included. Instinet- Instinet believes that there should be no restrictions on the markets in which an ATS can trade securities, Versus- No limitation should be placed on the securities that can be traded in the ATS subject to compliance with applicable securities laws in Canada. Ontario Teachers’ Pension Board- No limitation should be placed on the securities that can be traded in an ATS, subject to compliance with applicable securities laws in Canada.

	Response: As the definition of “ATS security” will be eliminated, there will be no limitation on foreign markets. See response set out above for “ATS security” for discussion of risk disclosure required.
7. Volume thresholds (National Instrument 21-101, section 6.5)Question 1: Is 40 percent of the average daily dollar value of the trading volume in any type of security traded in Canada an appropriate threshold or should it be lower (for example, 10 percent or 20 percent)?Question 2: Should the CSA retain the second volume threshold set out in paragraph 6.5(1)(b) of the Instrument relating to 50 percent of the average daily dollar value of the trading volume in any security and 5 percent of the average daily dollar value of the trading volume in any type of security trading in Canada? Question 3: Is it feasible to require ATSs to calculate the volume threshold when dealing with foreign markets?	TSE- Any threshold will necessarily be arbitrary, as it will be difficult, if not impossible to pre-determine when a trading system has achieved a critical mass making it a major player in a market. However, the thresholds are far too high. The proposal is not clear on how the thresholds will work, as they are tied to the ATS’s share of trading in a type of security. Joint Exchanges- The thresholds should not be set so high that an ATS, which does not have to belong to an SRO or is not required to have the same regulatory standards as an exchange, may have a greater market share than an exchange against which it competes. VSE- Even 10% is too high. It is difficult to understand why an ATS with such volumes, which are higher than some Canadian exchanges, should not have to register and be regulated as an exchange. It may not be feasible to calculate the volume threshold when dealing with foreign markets. Investor’s Group- The CSA should be keeping in touch with the exchanges and the IDA on an ongoing basis to determine whether the existing regulatory requirements a particular ATS is required to meet are adequate rather than imposing an obligation on the ATS to notify the CSA when certain thresholds are met. If these notification requirements are retained, any percentage chosen as the threshold for giving notice is necessarily arbitrary and certainly the levels should not be lower than those proposed. Bloomberg- It may be more appropriate to focus on objective factors, such as determining whether a marketplace performs exchange-like functions (eg, having members, enforcing compliance with its own rules, regulating activities of members, etc.). If the volume-based method of making the ATS/exchange distinction is used, some additional detail will be required to explain the manner in which the calculations will be performed. For securities trading outside Canada, not confident that the information necessary to perform this calculation would be available. Instinet- The 40% threshold is an acceptable starting point. Such thresholds are always arbitrary and can have unanticipated consequences and, accordingly, should be subject to periodic review. A question that deserves additional thought is whether achieving the 40% trading volume in a single security is an adequate basis for reclassifying an ATS as an exchange. The 5% ceiling applicable to the second threshold seems too low and may prematurely and unfairly penalize electronic brokers that are successful. Even if it were feasible for ATSs to calculate the volume threshold when dealing with foreign markets, the effect of the rule is to penalize ATSs for their success in foreign markets by adding their share of trading in those markets to the local share which may be modest.
	IDA Committee- In view of the fact that the Committee has concluded that market regulation should be separated from the stock exchanges, the need for the 40% threshold is unnecessary. The Committee believes that the requirement for notification of trading volume changes would be beneficial. The difficulties in terms of accessing true volume statistics from foreign markets such as Nasdaq make the inclusion of foreign market data problematic. Versus- Versus does not concur with the view that volumes traded within the ATS alone, at a certain level, may result in the characterization of the ATS being that of an exchange. ATS could be required to report their trading volumes to the CSA so that ATS trading volumes could be monitored against the comparative volume thresholds considered relevant by regulators. At the same time, registered dealers who are not regulated as ATSs should also be required to report volumes traded. Reports should be required to indicate volumes traded both within and outside Canada so regulators could have some basis for assessing the extent to which securities are traded by Canadian registrants on the alternative domestic and foreign marketplaces. It is also Versus’ view that, as the threshold tests are drafted, it is not feasible to calculate the thresholds contemplated. TraderDirect- The trading volume numbers for the debt securities from the Bank of Canada are not available until three months after the end of each calendar quarter. The trading volume thresholds are based on trading on “marketplaces” but does not include the trading volume number for direct purchase and sale transactions (eg., direct trades between dealers). In the fixed income market, a significant proportion of the volume of trades is conducted through direct trades. Bank of Canada- This type of percentage rule may translate into fixed income IDBs becoming exchanges, which in turn would require IDBs to provide a listing function for fixed income issuers such as the Government of Canada. Fixed income markets are presently decentralized (fully fragmented) and as such it is not clear how efforts to maintain a certain degree of centralization for equity markets can be equally applied to fixed income markets without affecting, perhaps negatively, the liquidity and efficiency of these markets. Ontario Teachers’ Pension Board- In order to determine if an ATS has become the dominant marketplace it would be necessary to add a time span in which the predominance of trades occurred in an ATS (perhaps over 6 months to 1 year). Response: The first volume threshold will be reduced from 40% to 20%. The second volume threshold will be eliminated. It is proposed that ATSs report their trading volumes to the CSA. Due to the difficulty in calculating the volume thresholds for foreign markets, the calculation will only be applicable for securities traded in Canada. With respect to the fixed income market, appropriate volume thresholds are no longer an issue as IDBs will be excluded from the definition of marketplace provided that information is provided for purposes of transparency.
8. Principal Trading Restriction	TSE- The restriction may act as a disincentive to dealers seeking to establish their own ATS and act as a barrier to entry to some US ATSs that are owned by

(National Instrument 21-101, section 6.6)Question 6: Should there be a de minimis exemption for principal trading in order to encourage dealers to invest in ATSs?	American dealers; it will not prevent a third party from offering dealers a system to internalize their order flow. The key is to ensure that the regime as a whole is not so unbalanced that it provides an incentive for dealers to withdraw from the public markets and establish their own ATSs. Joint Exchanges- The proposed restriction would likely be ineffective because a third party could still offer dealers a system to internalize order flow. CIBC World Markets- Since the Canadian market is dominated by a small number of investment dealers, most of whom are affiliates of banks, trust companies and other large financial market participants who trade for their own accounts, the prohibition would severely limit the ability of Canadian dealer-owned ATSs to achieve the kind of liquidity required to make them competitive. In addition, principal trading through a proprietary ATS has been key to the success of several ATSs in the US. If the principal trading prohibition were implemented, it would virtually guarantee that US ATSs would flourish at the expense of Canadian ATSs. Investor’s Group- Brokers who wish to participate should be allowed to do so as principal which will add to liquidity. Instinet- It does not appear that such a broad prohibition would achieve the goals articulated in the release. Whether or not dealers elect to withdraw from exchanges, the proposal will allow them to set up non-member ATSs that compete directly with the exchanges thereby producing what the prohibition was designed to avoid. IDA Committee- The Committee does not believe the restriction on principal trading is in the best interests of the Canadian market. If a dealer operating an ATS wants to deal as principal to enhance order flow and liquidity on that ATS, it is hard to fathom why this is detrimental to the overall equity markets- given the best execution, transparency and fair access provisions of the proposal. Versus- Versus concurs with the proposal to limit the level of ownership of an ATS by an owner that engages in principal trading in the ATS. Versus is of the view that the limit need not be expressed in terms of an outright prohibition of ownership but should be capped at a level that would preclude effective control of the ATS (up to a maximum of 10%). TraderDirect- The rationale for the prohibition against principal trading is relevant only for equity securities and should be limited to equity securities. IDA Capital Markets Committee- The restriction is likely to have a damaging impact on the development of electronic trading platforms in debt markets since it is dealers who would wish to deal as principal via ATSs for client transactions. VSE- The restriction on principal trading will not be effective since it would not prevent a third party from offering dealers a system to internalize order flow.
	Goepel McDermid Securities- There should not be a de minimis exemption for principal trading in order to encourage dealers to invest in ATSs. A regime of ATSs is being created to provide benefits to investors and issuers, it is not being created to satisfy the parochial interests of a limited number of intermediaries; however, as the ATS regime evolves and all participants gain a high level of confidence with it, it would be appropriate to revisit this issue. Ontario Teachers’ Pension Board- There should be an exemption for principal trading- ownership in an ATS should be limited to 10%. Want Canadian dealers to be innovative and able to compete with international dealers. However, there is a risk that if a large dealer owned more than 50% of an ATS, they could re-direct orders away from the exchange and a fractured equity market would result. Response: The principal trading restriction will be eliminated.
REGIME APPLICABLE TO EXCHANGES- PART 5, NATIONAL INSTRUMENT 21-101
9. General	TSE- Care must be taken to achieve a balance between ensuring effective oversight of public markets and not putting unnecessary hurdles in the path of those markets. In a competitive environment, the Commissions should focus on how the exchanges carry out their self-regulatory functions: are they comprehensive, properly administered and fairly applied? The Commissions should not focus on the business of the exchange, as that is subject to competition and the discipline of market forces. Joint Exchanges- The CSA should not place new and we believe unnecessary administrative and regulatory burdens on exchanges in the competitive environment being created. The CSA should consider that ATSs will be subject to minimal oversight, yet at the same time, the CSA is planning on involving itself in business areas of the exchanges. This will slow and hamper exchange responses to competitive pressures. Response: Other than systems’ capacity and integrity requirements, the requirements set out in the proposal are standards that the Canadian securities regulatory authorities have applied and are currently applying to recognized markets.
10. For-profit entity	TraderDirect- Can an exchange be a for-profit entity? Response: Yes- an exchange can be a for-profit entity.
11. Access Requirements (National Instrument 21-101, section 5.1)	TSE- The proposal does not state why the rule is necessary. Any applicant for exchange membership can ask the commission to review a decision to deny access or to impose conditions on access. TraderDirect- Section 5.1(b) provides that a recognized exchange shall not unreasonably prohibit or limit access. IDA Regulation 2100 presently limits an
	IDB’s customer base to customers approved by the IDA. There could be a conflict between open access under the proposal and the IDA Regulation. Response: An exchange has self-regulatory responsibilities and must ensure that investors and market participants are treated fairly. In general, SRO requirements may be a cause for review.
12. Public Interest and Discipline Rules (National Instrument 21-101, section 5.3, 5.4)	TSE- Exchanges should have explicit self-regulatory responsibilities and should be required to enforce compliance with their rules. This may have limited impact if the exchanges’ ability to regulate beyond the framework rules is restricted by their need to compete with ATSs. Response: An exchange will have the choice to determine what rules are necessary in addition to the framework rules.
13. By-Law Filing (National Instrument 21-101, section 5.5)	TSE- The broad scope of the filing requirement leaves open the possibility that the day-to-day application of exchange rules may be subject to prior approval by the Commissions. Exchanges are frequently called upon to interpret their rules as they apply to specific trading situations and to allow one-off exemptions from those rules to permit certain trades. Response: This was not intended to change the current practice. It should be noted, however, that the current practice could be modified by any subsequent agreements or protocols (such as the protocol between the TSE and OSC for Commission oversight of TSE rule proposals) or any protocol entered into between the securities regulatory authorities for oversight. The rule will be amended to refer to by-laws, rules, policies and other similar instruments. The proposal sets out a filing requirement.
14. Filing of Annual Financial Statements (National Instrument 21-101, section 5.6)	TSE- Exchanges should be required to file annual financial statements with the commissions that have recognized it. Response: The CSA have retained the requirement that exchanges file annual financial statements.
15. System Capacity Requirements (National Instrument 21-101, Part 11)	TSE- Urge the CSA to lower the thresholds that would subject ATSs to the system capacity rules. Response: The rule will be revised to provide that all ATSs will subject to section 11.1(a)-(e). Exchanges and larger ATSs (those that meet the 20% threshold) will be subject to all requirements in section 11.1 (subsections (a)-(g)). The 20% threshold seems reasonable. The threshold will only be calculated with respect to trading volume on all marketplaces in Canada.
B. FORMS
1. FORM 21-101F1- APPLICATION FOR AND AMENDMENTS TO APPLICATION FOR RECOGNITION AS AN EXCHANGE OR QUOTATION AND TRADE REPORTING SYSTEM

General	TSE- Form 21-101F1 is incredibly detailed. This raises two concerns. The first is that maintaining the accuracy of the information in the form will become a significant administrative burden for an exchange, particularly as any changes must be filed within 7 days of the change. The second is that it suggests that the commissions may consider all information in the form subject to their oversight. In particular, this raises the spectre that prior commission approval may have to be obtained for fee changes and for routine matters such as appointments to standing committees. The form should be limited to that which the commissions truly need in order to carry out their oversight responsibility. If the commissions believe that other information ought to be publicly available, it would be more effective to mandate that exchanges make the information available than to institute a cumbersome filing and updating procedure. Response: The information required would not limit Commission oversight. The CSA have reviewed the forms and are of the view that the following information should be provided in Form 21-101F1: Exhibit A Exhibit B- amended to refer to “rules, policies and other regulatory instruments” Exhibit C Exhibit D- eliminate #5 (procedures for ensuring compliance with system usage guidelines) and #7 (attach a copy of the users’ manual) Exhibit E- only to be provided if not otherwise provided with Exhibit B Exhibit F- only to be provided if not otherwise provided with Exhibit B Exhibit G- only to be provided if not otherwise provided with Exhibit B Exhibit H- if a new exchange, FOFI should be provided Exhibit I Exhibit J Exhibit K Exhibit L- only to be provided if not otherwise provided with Exhibit E Exhibit M Exhibit N- Amend to include a list of listed companies including those that are suspended from trading (the list of companies suspended from trading should be updated when a company is either reinstated or delisted)
2. FORM 21-101F3- QUARTERLY REPORT OF ALTERNATIVE TRADING SYSTEM ACTIVITIES
General	Bloomberg- Would like confirmation that this form only requires reporting of trades in Canada. Anticipate providing a list of Canadian subscribers only. It is noted that question 3 is identical to the reporting requirements imposed by the SEC. In the US, Bloomberg is permitted to respond to this question by providing the SEC with a list of all securities that are eligible for trading rather than a list of the specific securities that were traded. Response: Form 21-101F3 requires reporting of trades in Canada. An ATS would be required to provide a list of all subscribers to the Canadian ATS. Specific securities traded on the ATS (volumes traded) should be provided.

C. DATA CONSOLIDATION AND MARKET INTEGRATION
1. General	Institutional Equity Traders Association- Concerned with the level of detail with which the CSA proposes to achieve its proposed goals of market data consolidation and trade integration. The new regime for regulation of existing markets will clearly incur significant costs and create serious obstacles for present market participants. VSE- VSE recommends that development and implementation of the Consolidation Plan be achieved through participation by industry-wide consultations rather than the issuance of an RFP to a third party. Instinet- Instinet urges the Consolidation Plan be revisited: (1) The impact of the proposal on existing ATS operations has to be considered in the context of any technological enhancements the proposal may require and the cost of those enhancements (2) Start up operations should not be exposed to excessive technological barriers to entry. (3) The existence of a technological means of achieving the consolidation plan is taken for granted yet the intended result may not be achievable. (4) The nature of the technology used by the data consolidator and market integrator has policy implications that are not considered in the proposal. (5) Until technological possibilities are known and the RFP process is complete, the contribution of data to a data consolidator should not be mandatory but should be treated as a proposed feature of the system. (6) The Consolidation Plan entails radical changes in the way that order flow is handled which have not received as much attention as other aspects in the proposal. IDA Capital Markets Committee- The proposal for improving transparency and access to domestic markets could have a range of unexpected and damaging effects on the debt markets. Given that debt markets are essentially dealer-driven, requiring direct access to the markets may lower dealer willingness to take principal positions. Response: The RFP will state the functional and operational requirements for the consolidator. Interested parties responding to the RFP will be asked to include information about the technology they will provide and the model they will use for cost recovery and revenue generation. With respect to the fixed income market, IDBs will be required to provide information for transparency purposes. IDBs, however, will not be subject to market integration due to the nature of the fixed income market.
DATA CONSOLIDATION
2. Consolidated Market Information (National Instrument 21-101, Part 7)	TSE- Rather than mandate the means by which the goal is to be achieved, the CSA should simply mandate that order and trade details must be available to all market participants. Exchanges and ATSs should be given the responsibility for ensuring that these goals are achieved, and the CSA would only need to regulate if the markets failed in doing this or unreasonably excluded certain marketplaces from the system.

	Joint Exchanges- Do not agree that the CSA needs to be involved in determining the means by which data would be made available to market participants. A market-developed solution would be preferable. Response: Relying on voluntary solutions has not always worked and has taken considerable more time. The rules provide a minimum framework for providing information to the data consolidator. This is necessary to ensure that the consolidator is established quickly and effectively.
3. Prescribed Information (National Instrument 21-101, Part 7)	TSE- Concerned about the suggestion that the prescribed information is the only information that a marketplace may provide the consolidator. The proposal should be amended to clarify that while the consolidator cannot compel a marketplace to provide data over and above that set out in NI 21-101, nothing precludes a marketplace from entering into a commercial arrangement with the consolidator to distribute additional data. Institutional Equity Traders Association- The CSA should not be mandating prescribed information so as to prevent marketplaces from entering into arrangements with the data consolidator to distribute additional information. Response: The members of the CSA have specified requirements that are necessary to provide to the data consolidator. There is a concern that if any additional information is permitted to be provided to the data consolidator, the data consolidator would be crowded with excess information that participants might not find useful. This would impact the effectiveness of the data consolidator. Of course, any additional information could be provided by a particular marketplace.
4. Governing Committee (Consolidation Plan)	TSE- Concerned governing committee would set fees for market data and determine reimbursement to the various marketplaces. Changes in the market data industry require flexibility to make pricing and policy changes required by new end-user access technologies. Versus- Versus concurs with the proposal that the data consolidator be subject to independent regulation by a Governing Committee. Because of the additional investment that will be required on the part of ATSs to integrate its systems with the data consolidator to facilitate public dissemination of consolidated data, it is important that there be a means for determining the appropriate reimbursement for the marketplaces, including ATSs, contributing to the system. Response: The structure of how advice and recommendations will be made to the CSA will be clarified further in the RFP.
5. Pre-trade information transparency (National Instrument 21-101, section 7.1)	TraderDirect- Would CanPX be considered a data consolidator? Although the five best bid and ask price levels is relevant for equity securities, it is not relevant for fixed income securities. Depth is not currently shown in the fixed income market. If a marketplace displays an order to a person or company, it must be provided to the data consolidator. Should there be a market share threshold? What is meant by display an order to a person or company?

	Response: For the fixed income market, IDBs are excluded from the definition of marketplace but are required to provide information to the information processor in the format required by the information processor. The information will be consolidated on a non-attributed basis.
6. ATS participation in data consolidator	TSE- American ATSs participate in the Consolidated Quotation System and the Intermarket Trading System through their SRO unless they register as an exchange. They do not share in the revenues from data sales but they also do not bear any of the infrastructure costs. If the CSA adopted the TSE’s proposed model for regulation of ATSs in Canada, all the CSA would have to mandate is that the exchanges link to consolidate data. CIBC World Markets- Support the revenue participation of ATSs in a consolidation function provided that participants also share in the responsibilities and costs of that function. Response: ATSs will participate in the revenues from data sales provided that they also share in the costs of the system.
7. Feed Pricing	VSE- As the marketplaces provide the information to the data consolidator, the VSE believes that each marketplace should receive their feeds from the data consolidator without fees attached. Response: This is an issue to be addressed through the issuance of an RFP.
8. Choice of Data Consolidator	TSE- Currently, Canadian market data is distributed on the High Speed Vendor Feed and the Consolidated Canadian Data Feed.Using existing feeds means that consolidated data could be made available almost immediately, no matter which entity is the consolidator. VSE- The existing infrastructure is well positioned to fulfil the requirements for trade consolidation. If markets link through exchanges, the need for a centralized third party is eliminated. IDA Committee- Stock exchanges through the Canadian Exchange Group (CEG) have played an effective and key role in consolidating trade information from all exchanges for display to domestic and foreign investors. The CEG group has the mandate to aggregate market information from the exchanges and distribute to vendors. While the consolidator should ultimately be determined through the RFP process, CEG would be a logical candidate to take on this role. CIBC World Markets- CEG should be favoured as the “data consolidator”. CEG plays this role currently and to select any other party would lead to a costly “reinvention of the wheel”.
	Institutional Equity Traders Association- The prescribed information would require vendors to develop a new data feed in addition to the one currently used. Ontario Teachers’ Pension Board- The primary criterion for the data consolidator must be technical expertise and the secondary requirement should be good communication. The third requirement should be independence from other participants that have an economic self-interest in promoting a particular market function such as an ATS. Would like to see the data consolidator operate on a cost-recovery plus basis- should be able to charge for additional information and services that exceed what has been proposed. Response: Any interested party (including CEG) can respond to the RFP for the data consolidator and will be considered. As part of the RFP, the members of the CSA will develop criteria for the data consolidator including technical expertise. Another important requirement would be how the data consolidator proposes deal with any conflicts of interest.
9. Unavailability of Data Consolidator	VSE- In the event of unavailability of the data consolidator’s systems, each marketplace should continue operation in a local trading only mode. Should the data consolidator experience multiple system failures, there should be an option to cancel the service agreement and re-bid to another provider. Response: In the event of unavailability of the data consolidator, each marketplace would continue trading in “local mode”. There should be a mechanism to revisit the selection of the data consolidator.
10. Depth of market (National Instrument 21-101, section 7.1)Question 19: Should the display of data include the volume at each price level for the best five prices on the bid and offer for each participant system?	TSE- Market developments may require new displays. For example, if markets move to penny trading, an exchange or ATS may determine that it must display more than 5 price levels in order to show meaningful depth. Bloomberg- Support the display of data, including the volume at each price level for the best five prices on the bid and offer for each participant system. Goepel McDermid Securities- The goal should be a display at the consolidator/ integrator level of the best five price levels on the bid and offer including both volume and number of orders at that particular price level. Each ATS must be free to display whatever level of information it deems appropriate to the needs of its own subscribers. Investor’s Group- The display of data should not include the volume at each price level for the best five prices on the bid and offer for each participant system. The display of pre-trade information is solely at the client’s discretion. Clients own their own orders. Only once a trade happens does the information become public information posted on a consolidated tape. VSE- It is not clear whether the data consolidator is to provide the complete depth of market for all locations for the top five prices. For example, there are five marketplaces with bids and asks at five different price levels. Each marketplace
	would send five bid and five ask messages with volumes aggregated. Does the data consolidator then disseminate fifty messages or ten (five bid and five ask?). The VSE supports the dissemination of all price information received by the data consolidator. Instinet- A better approach would be to display the best bid and offer and aggregate quantity across all systems contributing data to the data consolidator. Customers should have the authority to regulate the degree to which their orders are made the subject of mandatory display obligations. IDA Committee- The Committee supports this recommendation, However, the Committee would also propose that the consolidator be given sufficient flexibility to accommodate additional information as markets evolve. Versus- This requirement should serve as the minimum requirement. Subject to this minimum standard, there should be no restriction or limitation on the level of additional information that a marketplace may choose to display. Ontario Teachers’ Pension Board- The minimum standard should be the information market participants have now. Subject to this minimum there should be no restriction or limitation on the level of additional information that a marketplace may choose to display. Response: Each marketplace will be required to provide information to the data consolidator regarding the five best bid and ask levels for each security traded on the marketplace. Reserves are not required to be displayed. There is no restriction on the level of additional information a marketplace may choose to display. The data consolidator will collect all information and disseminate a consolidated market feed including the total volume bid/offered at each of the best five price levels of each security traded.
11. Separate Canadian Dollar Page (Consolidation Plan)	TSE- The proposal does not give a reason why a market would be prohibited from converting prices in a US dollar book. The exchanges trade some securities in US dollars. The data consolidator should report orders and trades in the currency used by the principal market. Response: Some securities listed in Canada trade in US dollars. These securities may be displayed in US dollars by the data consolidator. The data collected and disseminated for securities which are listed in Canada and which trade in Canadian dollars will be shown in Canadian dollars by the data consolidator. The information provided to the data consolidator must reflect prices maintained in a Canadian dollar book and not converted from a US dollar book.
12. Broker Designations	Bunting Warburg Dillon Read Inc.- The proposed omission of broker designations on trades will lead to misinformation as brokers will routinely put up trades when they are clearly not theirs. With the use of broker numbers, customers can see who has transacted and engage in a conversation with the transacting broker and seek the true picture on the stock.

Institutional Equity Traders Association- The omission of this information will decrease information transparency and competition for all market participants. Broker numbers promote competition in the marketplace as institutional traders are able to seek out the most competitive offers for block trading. The display of broker numbers also plays an important marketing and business enhancing role for the Canadian brokerage community. Response: Additional information (including broker designations) could be provided by a particular marketplace; however, any additional information should not be provided to the data consolidator.

13. Transaction Fees (National Instrument 21-101, Part 9)

TSE- While it is agreed that transaction fees may determine whether or not a particular market has a better price, the rule as drafted will be difficult to administer, particularly for a market such as the TSE which has an overall cap on transaction fees. Whether the fee must be displayed will depend on the size of a trade, not necessarily the size of an order. The proposal should be amended to provide that if a trading fee is greater than a certain percentage of the total value of a transaction it must be displayed in the price. CIBC World Markets- Strongly oppose the proposal to require the disclosure of transaction fees in bids and asks displayed in the consolidated marketplace. Fee structures implemented by ATSs are likely to vary widely and may be staged according to the dollar value or number of securities being traded. An alternative approach would be to publicly post all trading fees through the data consolidator. TraderDirect- The concept of a fee per security purchased or sold is appropriate for equity securities not for fixed income securities. The fee for debt securities is based on the dollar amount of the fixed income securities purchased or sold (eg., $100 for each $1,000,000). Commissions are reduced as trade volumes increase such that the commission is not determinable until the trade is over. Versus- “Transaction fee” should be defined in a manner that excludes commission charged by the ATS. For the ATS/broker, commission is a privately negotiated fee that may vary from client to client or in the circumstances in which the client trades. Commissions may vary, for example, depending on volumes traded. In some circumstances, commission may be waived altogether in respect of a particular trade. In addition, commission charged by the ATS/broker is confidential, completely sensitive information. It should be left to the client to assess the best trading opportunity available to it, taking account of the publicly displayed order price of the security in the data consolidator and the additional transaction charges disclosed separately and privately to the client. Ontario Teachers’ Pension Board- If this is an ATS usage fee and a commission fee is on top of the transaction fee, then we agree this “transaction fee” should be shown. The commission is a matter for determination between client and broker.

	Response: The transaction fee is not intended to include the commission charged. The proposal will be amended to provide that each marketplace will be required to publicly post a schedule of trading fees for outside users to the data consolidator. Each system would be required to calculate the applicable fee.
MARKET INTEGRATION
14. Existing Infrastructures	Joint Exchanges- The existing infrastructures are well positioned to meet the requirements for visibility and efficient order execution. Since all markets would be effectively linked through the exchanges, there would ultimately be no need for a third party, centralized integrator. Response: There are several options regarding how market integration could be implemented. This will depend on the number of participants in the market and the amount of activity which is generated between markets.
15. Access	TSE- The CSA should mandate the goal (best execution with no trade-throughs) and leave it to the markets to determine how best to achieve that goal. Joint Exchanges- The CSA should mandate the goal and leave it up to the markets to determine the most efficient and fairest way to achieve the goal. TraderDirect- Does this provision mean that each IDB would have to provide its competitors with access to orders on such IDB’s marketplace? Response: In Phase 1, the goal is mandated and the markets are left to determine how best to achieve this goal. Any changes for Phase 2 will depend on how well market integration functions in Phase 1.
16. Time for Markets to Respond to Orders	TSE- The proposal states that a market that routes an order to another market to fill a better-priced order will be able to treat that order as “dead” if it is not filled in three seconds. The CSA should not mandate a specific turnaround time unless the participants in the system are unable to agree on an acceptable speed for the system. Setting turnaround time limits will inevitably lead to disputes if the internal clocks of all marketplaces are not synchronized. Even if they are synchronized, any time limit should be limited to the time an order is within a particular market’s system. In other words, a market should have three seconds from the time it receives an order to send a “filled” or “cancelled” response. Response: Any marketplace should expect to receive a response (fill, cancel) to an order in under 3 seconds. Three seconds is the outer limit and not an unreasonable period of time given today’s technology. The Marketplace Instrument and the Trading Rules address synchronization.

17. Fixed Income Markets

Bank of Canada- Given that most fixed income market makers subscribe to all existing fixed income IDB systems, this market consolidation provision would not, at this time, significantly increase the degree of market consolidation that currently exists in the interdealer sphere. IDA Capital Markets Committee- The notion of consolidating the various markets may be antithetical to the notion of maintaining a dealer market. Trader Direct- How would the concept of “principal market” apply in the fixed income market? Response: Due to the structure of the fixed income market, the CSA have determined that the market integration provisions will not apply. The CSA are of the view that increased transparency will be beneficial to customers. Although customers would still have to contact dealers directly to make the trades they wanted, it is likely that information will increase their bargaining power and their interest in trading.

18. Trading During HaltsQuestion 22: Should any restrictions be placed upon an ATS when there is a regulatory halt imposed by the market where the security is listed or quoted? Should it matter if a halt is imposed by a recognized quotations and trade reporting system?

TSE- ATSs should not be permitted to trade a security if the principal market has halted trading for a regulatory reason (they should be permitted to trade if the market is not open because of systems problems). Joint Exchanges- ATSs should not be permitted to trade if the principal market has halted the security for regulatory reasons. Goepel McDermid Securities- The protocols covering trading halts should be: (i) All trading halted system wide if requested by a reporting issuer or another party having material information to disseminate; (ii) All trading halted if a regulatory halt is imposed by an established SRO according to a well defined set out criteria; (iii) Any halt that does not fall into one of the two above categories would only impact the particular ATS or ATSs that chose to impose it. Bloomberg- If there is a regulatory halt imposed by the market where the security is listed or quoted, an ATS should follow. Investor’s Group- If a trading halt is imposed by any market on which a security trades (eg., pending dissemination of information), trading on all other trading systems should be halted as well. IDA Committee- An ATS should not be permitted to trade a security which is subject to a regulatory halt in the principal market. Versus- If a trading halt has been imposed on a security by its primary market, ATS should not trade that security until the halt has been lifted. Instinet- The regulator should have an electronic messaging capability capable of being engaged unilaterally by the regulator that will automatically communicate

	appropriate messages to ATS users. The extent of intervention should be halts for the dissemination of information. Ontario Teachers’ Pension Board- If the primary market has imposed a trading halt, ATSs should not trade the security until the halt has been lifted. Response: ATSs should not be permitted to trade if the principal market has halted the security for regulatory reasons.
19. Phase One- Principal Market Integration	Versus- Versus is concerned that the exchange marketplaces could delay in implementing the technical work required for Phase 1 of the proposal. Versus suggests that no aspect of the proposal that contemplates integration in the operation of marketplaces should be enforced against an ATS until it can be equally enforced against the exchange marketplaces. If it appears that implementation of Phase 1 will be unreasonably delayed due to required technical, Versus suggests that Phase 1 be implemented in two stages. The first stage would involve marketplace integration with the data consolidator and the implementation of the proposed trading rules. The second stage would involve the integration of the ATS and exchange marketplaces. Response: In Phase 1, systems that are technically able will not have to wait for those systems that do not have the necessary technology. An ATS will be able to proceed even if there are technical issues with other marketplaces.
20. Phase Two Market Integration	Versus- Versus believes that once Phase 1 has been implemented, a further opportunity should be extended to market participants to comment on the specific details that relate to Phase 2. Response: It is intended that an advisory board will be established and there will be consulting before Phase 2. The final decision will be left to the members of the CSA.
21. Phased Implementation	CIBC World Markets- Support two-staged approach. With respect to Phase 2, the CSA should mandate the ends but not the means to achieving full order-routing integration. Since it is believed that market forces will result in the development and adoption of the most effective approach to integration, do not favour RFP process which would ultimately grant a monopoly on the provision of order-routing services in Canada. VSE- The VSE supports the phased approach. If properly implemented, all marketplaces are inter-linked through the exchanges thus eliminating the requirements for a 3rd party. If would become the responsibility of the exchanges to ensure the intermarket links are operational and used in a manner that protects investors’ interests. IDA Committee- The Committee believes that the complex linkage of the proposed order-routing system is designed to promote a central limit order book.

The more serious concern is that Phase 2 would have a detrimental impact on the competitiveness of the domestic market. Trying to incorporate price/time priority access different trading systems with different trading technologies is challenging and practically very difficult. Also concerned about the costs of the system which will be recouped through charges to access the trading systems. Mandatory Phase 2 integration may be largely unnecessary as it will happen naturally. Versus- Versus is supportive of phasing-in implementation. Versus concurs that the initial phase of the proposal should proceed rather than delay implementation until all technical aspects of market integration can be implemented. Bank of Canada- Without an existing principal market for fixed income securities, it is not clear how this consolidation plan can be implemented. IDA Committee- The Committee recommends that the CSA stipulate deadlines, as opposed to a convoy approach, where we wait until everyone is ready. Ontario Teachers’ Pension Board- The phased approach is the most practical method to start the process. The ideal starting date for implementation is as soon as possible. The CSA should have an oversight role in the implementation of the phasing in process. An advisory group will be required to drive the process, otherwise it could easily bog down in details. Response: The Phased Approach outlined in the Consolidation Plan has been developed to allow marketplaces to proceed and not wait until each marketplace is ready. Phased implementation leaves open the possibility that it may not be necessary to proceed to Phase 2. With respect to the fixed income market, if there is no principal market, an exemption may be given.

22. Trading After HoursQuestion 17: Should ATSs be allowed to trade outside the closing bid-ask of the principal market or should they be required to trade within the closing bid-ask on the principal market? Should this change if the exchanges extend trading to include evening hours?

TSE- ATSs should not be restricted in after-hours trading to the closing bid and ask in the major market. If ATSs trade during the pre-opening sessions, it will make the opening process more difficult as orders will be constantly changed to reflect trading in the ATS. However, this is unavoidable. If ATSs garner significant order flow because they trade before or after the principal market is open, the principal market will have to seriously consider extending its own hours to match the ATS. Joint Exchanges- After hours trading may be acceptable if there is sufficient liquidity to ensure a fair market which is not always the case for the junior market. Goepel McDermid Securities- An ATS should be free to set whatever hours it wishes for its operations as should any exchange; furthermore to encourage ATSs to innovate, they should have as much operational flexibility as possible. The CSA should adopt a system wide policy of two no trade times (e.g., 5-6 pm and 8-9 am), thus allowing for predetermined periods when disclosure of material information can occur and also allowing for standard valuation reference points.

Question 18: Should ATSs operate in the pre-opening period of the principal market or should there be a no-trade time period until the principal market has opened for trading?	CIBC World Markets- In favour of permitting trades to be effected through ATSs outside the day’s closing quote. After hours trading would require that both the data consolidation and market integration functions be operational even if the principal market book is not actively trading. Bloomberg- Do not see any reason why ATSs should not be permitted to operate outside of exchanges hours. It is believed that trading should continue during the pre-opening period of the principal market and that information on the ATS trading book should be integrated into this procedure. Investor’s Group- ATSs should be allowed to trade outside the closing bid-ask of the principal market to offer investors a greater choice. Instinet- All brokers whether traditional or electronic brokers should be able to handle client trading outside the closing bid-ask as long as the information that is drawing the trades outside the closing is publicly available. Pre-open trading should not be restricted. IDA Committee- The Committee recommends that ATSs should be permitted to engage in after-hours trading outside the closing bid-ask of the principal markets. Versus- ATSs should be allowed to trade outside the closing bid-ask of the principal market. ATSs should be permitted to operate in the pre-opening period of the principal market. Ontario Teachers’ Pension Board- An ATS should be allowed to trade outside the closing bid-ask of the principal market. An ATS should be able to set whatever hours it wishes to operate as should the exchanges. Response: ATSs should be allowed to trade outside the closing bid-ask of the principal market. ATSs should be permitted to operate in the pre-opening.
23. STAMP Protocol	VSE- The Plan refers to the STAMP transaction protocol in use in Canada and proposes that the governing committee determine the transaction protocol. The international FIX protocol should not be specifically excluded. There are FIX-to-STAMP protocol converters. The VSE recommends that an industry-wide committee rather than the data consolidator determine transaction protocols. Response: The Consolidation Plan refers to the STAMP protocol as it is the current standard protocol used by the TSE, ME and CDNX. However, the FIX protocol is not specifically excluded.
24. Time Stamps	VSE- The Plan calls for time stamps to record seconds. As there may be many multiple trades in a second, there should be a further characteristic of “trade within a second” perhaps capable of accommodating up to 1,000 trades. Response: It may be necessary for the time stamp to record smaller increments than seconds. This will be considered in the context of the RFP.

25. “Fair Access” Rules	Bloomberg- The proposal contemplates that best bids and offers of each ATS must be accessible to other market participants, regardless of whether they are participants of the ATS. Fair access rules should be structured to permit an ATS to limit access to market participants that meet certain credit requirements. Some comfort would be gained if the CSA adopts a requirement that all ATS providers implement and apply credit requirements that meet minimum standards. Response: There is no need to limit access to market participants that meet certain credit requirements as the ATS (dealer) would be an IDA member subject to all credit requirements.
26. Pre-trade Surveillance	VSE- ATSs other than those that choose the exchange membership option are not specifically required to have a pre-trade facilitation process. Should the ATSs outsource pre-trade facilitation to exchanges, there would be a requirement for each ATS to transmit complete order data to the exchange. Response: There is no requirement for pre-trade surveillance. Surveillance and enforcement by an exchange can be performed in any manner; however, an exchange (“approved agent”) cannot impose requirements on markets it oversees. Surveillance and enforcement for other markets will be post-trade.
27. Market Integration Functions	VSE- Reference is made that the market integration functions may be performed by the data consolidator. Merging these two functions puts the Canadian capital market structure in undue risk. The goal of utilizing the existing infrastructure, which would result in distribution of workloads across multiple systems is more tolerant of system outages that could be disastrous in a centralized model. Response: There are several options regarding how Phase 2 integration could be implemented. The proposal contemplates that one option is that a single integrator/consolidator could provide the interconnection between all marketplaces. The solution will depend on the number of participants in the consolidated market and the amount of activity which is generated between markets.
D. NATIONAL INSTRUMENT 23-101 TRADING RULES
1. General	TSE- The fact that ATSs will not be required to join an SRO that performs market regulation means that ATSs will be subject only to the CSA’s framework trading rules. Further, the proposal is silent to who will address the inevitable gaps that will appear; the CSA is the only body that will be able to take on this responsibility. It is suggested that the CSA empower the exchanges with the power to give interpretations and to grant exemptions as is the current practice. The exchanges would report to the Commissions periodically on interpretations given and exemptions given. Nesbitt Burns- The trading rule proposals appeared to be outside of the context of the submission insofar as the focus was on the introduction of an ATS capability

into the Canadian market. Concerned as to the intent of these proposed rule changes. If implemented, either in whole or in part, would serve to drive liquidity into foreign markets. CIBC World Markets- The instruments are silent with respect to other trading rules that are currently promulgated and monitored by the exchanges. It is believed that the framework rules are too minimal in scope and that other existing rules should be applied to all marketplaces. Urge the CSA to address the full spectrum of existing trading rules and clarify which would apply across all marketplaces and how and by whom they would be monitored and enforced. Institutional Equity Traders Association- The trading rules go too far. Little justification is provided for the rules, some of which would have a significant negative impact on the entire marketplace and pose a burden for participants. VSE- If the same broader set of exchange trading rules is not applied to all markets where a security trades, there will be a race to the lowest common denominator. In general, the proposed rules, with the exception of the short selling rule, appear to have been developed for the senior market. IDA Committee- Rules have been proposed to address problems that may not exist and there is a lack of hard evidence for some of the restrictions that the CSA wished to impose on ATSs. Concern was also raised that the trading rules and restrictions on ATSs would encourage market participants to direct order flow to the US markets, thereby damaging liquidity of the domestic marketplace. Response: The framework rules provide basic common trading rules that the members of the CSA view to be necessary. The trading rules do not prohibit a marketplace from implementing additional rules that will apply to its own marketplace. It is expected that an exchange (or “approved agent”) will make initial decisions concerning the trading rules without obtaining approval from the CSA. With respect to granting exemptions, each exchange may continue to provide exemptions based on its own rules. Exemptions to provisions of the trading rules must be granted by the CSA.

2. Anti-Manipulation Rule (National Instrument 23-101, section 2.1)

TSE- The TSE supports the rule. The companion policy should be revised to make it clear that placing of a buy and sell order can be manipulative even if no trade results. The last sentence of the paragraph 2.1(4)3 of the companion policy should also be amended. It refers to entry of bids and offers to “raise the price to attract other trades for the securities, thereby creating demand”. This activity is only manipulative if the purpose is to buy or sell the securities at an artificial price. It is perfectly legitimate for a buyer or seller to tighten a market in an attempt to attract counterparties who are unwilling to trade at the current bid or offer prices. The language in the section suggests that this may be manipulative. Joint Exchanges- The exchanges support the rule.

Response: The CSA do not believe that it is necessary to make any change to the rule. Section 2.1 of National Instrument 23-101 provides that it is an offence to engage in, among other things, a transaction that results in an artificial price for a security. This would include manipulation by placing a buy and sell order even if no trade results. In addition, the CSA do not believe that the companion policy needs to be amended in the manner suggested as the rule provides that activity is only manipulative if a transaction results in an artificial price for a security.

3. Capping and Pegging Restrictions (National Instrument 23-101, section 2.3)

TSE- The proposed rule is too restrictive, cannot be surveilled adequately and is unnecessary given the general anti-manipulation rule. Its adoption will severely hamper liquidity in the options market. Rather than adopt a separate capping and pegging rule, s.2.1(4)3 of Companion Policy 23-101CP should be amended to include manipulative trading activity designed to increase the value of a derivative position. Joint Exchanges- This rule is not necessary given the anti-manipulation rule. It is too restrictive and would be impractical to enforce. Liquidity in the options market would also be hampered. CIBC World Markets- Strongly oppose the proposed provisions relating to capping and pegging because it is believed that the provisions run counter to the current, ordinary course hedging practices of writers of options. These rules, if adopted, would make it very difficult to hedge written options. The CSA’s objective under the proposals seems to be to prevent writers of options from engaging in the manipulation of price of underlying securities for the purposes of putting the options “out of money”. That objective is adequately addressed in sections 2.1 and 2.2. Institutional Equity Traders Association- Do not support the proposed capping and pegging rules as they are too restrictive. Manipulative trading activity, which is designed to ensure that an option expires out of the money, should not be allowed; however, such activity should be captured by the general price manipulation rule. A blanket restriction against capping and pegging would prevent a person or company that has sold both a put option and a call option in the same class of securities from hedging positions in this security. This would likely cause dealers in the institutional derivative market to withdraw from that market and effectively terminate the Canadian options market, thus driving liquidity to competing markets in the US. IDA Committee- This rule is unworkable and would have a detrimental impact on the liquidity of markets. It is difficult to see how this rule would be monitored and enforced. The intent could be adequately captured by the manipulation rules. Ontario Teachers’ Pension Board- A rule that is directed towards manipulation will be difficult to police and may have a detrimental impact on the development of the Canadian derivative market. It needs to be more closely examined.

Response: This rule will be deleted as the restricted activity could be captured by the general anti-manipulation rule. The Companion Policy will be amended to include manipulative trading activity designed to increase the value of a derivative position as an example of manipulative trading (s.2.1(4)3).

4. Short Selling (National Instrument 23-101, section 3.1)

TSE- The TSE urges the CSA to implement a “zero tick” rather than a “zero-plus tick” pricing rule. The TSE’s current rule is effective and no adverse impact on the market has occurred. If a particular exchange believes that a more stringent rule is necessary because of the nature of the securities it trades, it could adopt a more stringent rule. Further, several exemptions in the TSE short sale rule should be included. The transactions exempted are ones in which concerns about manipulating the price through short sales are minimal or non-existent or are ones that are necessary to allow market makers to carry out their responsibilities. IDA Committee- The current TSE short sale rule is more flexible (there are several exemptions) and permits trades at the last sale, even if it is a downtick. The TSE has concluded that its rule has not been detrimental to the public, and it provides competitive advantage for Canadian equity markets, thereby contributing to liquidity. The Committee supports the TSE short sale rule. Bank of Canada- A dealer in fixed income markets sells short a security it does not own by carrying out a parallel transaction in the repo market. When it comes time to deliver the security the dealer does not own, the dealer will enter into a repo transaction with another dealer or a customer. Short sellers in the fixed income market are almost exclusively dealers. Restricting the dealers’ ability to sell short may reduce market liquidity since market making activities are influenced by their ability to make markets, hedge undesired inventory or fund these positions. Bunting Warburg Dillon Read Inc.- If the short sale rules were applied, the TSE would lose an important creator of liquidity. The decision to go to a “zero plus tick” rule would disadvantage Canadian shortselling in favour of US distribution. CIBC World Markets- Support the position set out by TSE and IDA Committee. Institutional Equity Traders Association- The proposed short selling rule is too restrictive. The “zero-minus tick” rule maintains market stability, attracts business and creates liquidity. The less restrictive and more widely used “zero-minus tick” rule should be maintained in order to promote liquidity in the equity and derivative markets. The current TSE exemptions to the short selling rule should be recognized and included in the proposed rule. VSE- Pleased the CSA is proposing the adoption of VSE rule which requires upticks on short sales in order to ensure that any short selling is done into a rising marketplace. This would be consistent with all marketplaces in the US. The small venture company is often supported and promoted by individuals connected to the

	company and to give the ability to short sell in anything but a rising market may place undue financial hardship on a promising enterprise. IDA Capital Markets Committee- Short selling is more critical to the well functioning of the debt markets than it is to the equity markets. Ontario Teachers’ Pension Board- Currently in Canada a stock can be shorted at a price at least equal to the last sale of a board lot as displayed by the data consolidator. The application of the “up-tick” rule would significantly reduce arbitrage activity and the development of the futures and options market. Response: The CSA propose to amend the short sale rule to implement a “zero tick” pricing rule. Any marketplace is permitted to implement a more stringent rule.
5. Frontrunning (National Instrument 23-101, section 4.1)	TSE- The TSE agrees that market participants must be prohibited from taking advantage of information provided by a customer by trading with knowledge of an imminent material transaction in a security. However, the application of the rule in certain situations will become quite complex. It is suggested that the rule track the language of the TSE’s current rule. If the CSA’s analysis raises issues that it does not believe to be addressed by the rule, it is recommended the CSA refer those issues to the SROs and request a response. Joint Exchanges- These issues are complex; it is recommended that the rules are not implemented. Should be referred to the SROs for a recommendation. Bank of Canada- How do the frontrunning provisions influence fixed-income trading practices? Given that dealers have proprietary knowledge of their own order flow, dealers are in essence always frontrunning the other dealers as they rebalance their inventory using an IDB trade. However, dealers know this and trade with each other given this mutual awareness. It is not clear that the frontrunning must occur in a marketplace. In order to comply with the proposed rules, it is likely that dealers will be forced to reveal their proprietary order flow to IDB market participants if they chose to trade in an IDB. This would likely have a negative impact on the liquidity the dealers would offer to customers. Response: This rule will be retained as proposed. The intention is to prohibit market participants from trading with imminent knowledge of a transaction.
6. Trading ahead of research reports (National Instrument 23-101, section 4.1)	TSE- As with frontrunning, this issue is complex and fraught with grey areas given the close contact between the research department and the trading desks at many firms. The TSE and the other Canadian SROs have formed a committee on analyst standards that will examine, among other things, standards of supervision and compliance procedures for analysts. It is suggested that this committee be charged with making a recommendation on this issue.

	CIBC World Markets- The issue of trading ahead of research reports is very complex and involves a discussion and analysis of the relationships and “Chinese Walls” that exist between trading floor and research staff. This issue should be addressed separately to ensure that input is received from all people affected by the rules. Response: This rule will be deferred on the understanding that other committees are currently dealing with the issue (TSE Advisors Committee).
7. Insider Trading of Securities of Foreign Non-Reporting Issuers (National Instrument 23-101, section 4.2)	TSE- Agrees with the proposed rule although note it will not affect the TSE market. Response: This rule will be retained.
8. Best Execution (National Instrument 23-101, section 5.1)	TSE- Although TSE agrees in principle that marketplace participants look at markets outside of Canada to determine whether a better price exists, adopting this as a requirements may put Canadian markets at a competitive disadvantage. The TSE urges the CSA to work with the SEC to develop a uniform best execution obligation for American and Canadian brokers. The TSE does not understand the statement in the companion policy that a marketplace participant should have an order management system that is capable of providing price improvement. Joint Exchanges- The CSA should work with the SEC to develop a best execution obligation for American and Canadian brokers. CIBC World Markets-Support the rules regarding best execution. IDA Committee- The best execution rule would require market participants to make reasonable efforts to ensure that a customer receives the best price on a purchase or sale of securities. The Committee supports such an interpretation of the best execution rule and believes that this should be a key focus of market regulators. Foreign markets for interlisted Canadian securities should not be included in the best execution rule at this time because of the practical difficulties of complying with the rule. Versus- Versus suggests that there should be a clear articulation of the manner in which these rules are to be complied with during Phase 1 when ATSs are in the marketplace, integrated with primary exchange markets but not integrated with each one another. If the best priced order displayed through the data consolidator is in ATS2 at the time ATS1 is ready to proceed with a match at a lesser price, is ATS 1 obliged to forego the match at the lesser price in light of trade through rules imposed on the market participant? The rules should apply equally to all marketplaces and the definition of market participant should be expanded to include all brokers, including those who are not members of an exchange.

Response: This rule will be retained. It should be emphasized that there is no requirement in the best execution rule to specifically consider foreign markets. In the companion policy (section 5.1(1)), the CSA noted that, in making reasonable efforts, a marketplace participant should consider whether it would be appropriate in the particular circumstances to look at markets outside of Canada.

9. Cross Interference (National Instrument 23-101, section 6.1(1))

TSE- The cross interference rule is intended to reward market participants who display orders publicly. However, it likely will, at the very least, drive the block market in interlisted securities to the US. Although US exchanges in theory do not allow crosses, NYSE rules give priority to larger orders that completely fill a declared order. Even if block trades do not migrate to the US, the rule would be ineffective if trading increments dropped to a penny, as a trader executing a cross would simply improve the price by one cent to bypass the consolidated book. TSE recommends an order exposure rule similar to the TSE’s or the SEC’s. Market participants would be required to display orders. Joint Exchanges- The proposed rule is too stringent, too costly to implement and may not be effective. CIBC World Markets- Support positions set out by the TSE and IDA Committee. Institutional Equity Traders Association- The offsetting orders rule is intended to reward participants who display their orders publicly. However, the proposed rules do not ensure the existence or establishment of a Central Limit Order Book. This is illustrated by the US experience where the cross interference rule at the NYSE has sent liquidity to regional exchanges which has resulted in market fragmentation. As well, the requirements that exchanges and ATSs ensure that orders in other markets are filled before crosses are executed in their own markets will impose significant transactions costs and burdens across the market. The costs associated with the offsetting orders rule would not be outweighed by any beneficial effect on the price discovery mechanism in the market. IDA Committee- This rule attempts to establish “time” as a universal secondary priority rule and is much more restrictive than the US. NYSE rules allow larger orders to size out the market. In addition, crosses can be put through on regional exchanges with little difficulty. The imposition of this rule could negatively impact Canadian market liquidity, as it may encourage order flow to US exchanges. The rule might also be avoided by marking the order as an “all or none” trade. The Committee believes this rule will be costly to implement and in markets that are moving to decimal pricing, is of little significance to investors as long as the integrity of the best execution, transparency and fair access provisions are maintained. Bunting Warburg Dillon Read Inc.- If implemented, this rule would disadvantage our own customers as we would have to fulfil the prevailing market prices shown.

The new rules would force dealers to fulfil the market’s intention and not wait for the ultimate buyer or seller to come to the crossing broker who is willing to assume risk for his customer. This rule will undermine the stated intention of bringing business back to Canada and will lose it to other exchanges. Response: This rule will be deleted. As an alternative to the cross interference rule, an order handling rule will be proposed.

10. Customer-Principal Trading (National Instrument 23-101, section 6.1(2))

TSE- The TSE’s experience indicates that a threshold of 5,000 shares is sufficient. Raising it to 10,000 shares will capture a lot of institutional orders, especially as there is no maximum value. As with the cross interference rule, extensive changes to the allocation algorithm would be required. As with the cross interference rule, the rule will not be effective in a penny trading environment as pro traders would simply better the price by one cent. Joint Exchanges- The proposed rule is too stringent, too costly to implement and may not be effective. CIBC World Markets- Support positions set out by the TSE and IDA Committee. Institutional Equity Traders Association- The principal trading rules introduce a higher threshold than is currently in place at the TSE. No justification is put forward for this increase. It will result in more institutional orders being caught by the rule. The thresholds established by the TSE should remain in place. VSE- For the junior market, where the average share price is currently less than $1.00, the 10,000 share rule will capture a much larger number of orders that the rule intends. A dollar threshold should be considered to make the rule more applicable to the junior market. IDA Committee- This rule would prohibit trades for orders of up to 10,000 shares and require market participants to allocate these orders to a central limit order book for execution. In markets that are moving to a decimal system, the advantage of the rule to the investor is minimal compared to the significant programming costs required to comply with the rule. Versus- Versus concurs with the proposal as one that strengthens the public central auction market. Under current exchange rules, crosses effected by an ATS must be a minimum of 10,000 shares even if the ATS improves the price for the client. This share restriction has the effect of requiring the ATS to send all client orders less than 10,000 shares directly to the exchange book, even if the ATS could have matched its client order with another client and crossed it on the exchange. The restriction on order size in the ATS should apply only if the ATS is acting as principal and is not improving price over that offered in the public market. Response: The threshold will be revised to $100,000.

11. Time Priority

VSE- The Plan protects price/time priority within a marketplace, however, once an order is marketable, it is required to be routed to the marketplace with the best priced order. As there may be multiple marketplaces with best prices orders, the selection of which other marketplace to route will be at the discretion of the active order. Was this the intention? Another example is the sanctity of the order book to allow the best bid or offer to get the first shares traded at a particular price. If ATSs are allowed to trade the same securities, will they be subject to the same rules as the established marketplace? Goepel McDermid Securities- Presume an effective consolidator/integrator mechanism and that order interaction takes place in a strict price and time priority environment- this appears to be implicit but should be clarified. IDA Committee- The proposal appears to introduce a “time priority” standard. Price priority is usually the first rule of trading; secondary rules can include time, size, etc. Price priority is self policing; secondary rules are not. It is unclear to the Committee whether the benefits of requiring “time priority” outweigh the costs of universally enforcing it- especially when no requirement exists in the US. In addition, the requirement for “time priority” could have the detrimental effect of sending order flow away from trading systems that need order flow to build critical mass in the market. Response: Order integration will take place in a price priority environment. An order is required to be routed to the best priced order. If there are multiple marketplaces with the same best priced order, a marketplace will be able to route at the discretion of the active order.

12. Market RegulationFunction (National Instrument 23-101, section 7.1)Question 20: Should an ATS have to contract with the exchange on which a security is listed or should it still be able to choose the exchanges that will perform the market regulation function”? This question should be considered from both of the following perspectives: pre-exchange

TSE- Because an ATS will not be required to join an exchange and will not be permitted to perform market regulation, it is essential that it link to an exchange to ensure that effective market regulation is carried out. An ATS needs to link to as many exchanges as necessary to ensure proper surveillance of all securities that it trades. It would not be cost-effective for the TSE to build a new surveillance infrastructure to surveil trading in securities listed on the Vancouver and Alberta exchanges. The regime will be simpler for an ATS post-exchange restructuring as it will have to link with a maximum of two exchanges (assuming it does not trade derivatives). Joint Exchanges- In order to ensure effective market surveillance and regulation, ATSs must be required to link to all exchanges whose listed securities they trade. Nesbitt Burns- An attempt should be made to develop a consensual view in the area of market regulation. One option would be to establish an industry wide committee to discuss this issue and attempt to derive a unified view. Establishing a second market regulation function in Canada is not a desirable option. Industry negotiation is the first chose and, should that fail, the competitive market should derive the solution. ATS service providers should be required to provide market regulation in the same manner as the stock exchanges. Whether that service is

restructuring and post-exchange restructuring.Question 21: If an ATS is going to trade all listed equities (senior and junior) should it be required to contract wit both exchanges for oversight or with only one? This question should be considered from both of the following perspectives: pre-exchange restructuring and post-exchange restructuring?

contracted out or provided internally would be a matter to be resolved between the ATS and the CSA. Once the structure is established, the market forces would determine which entities are in fact providing a viable business. IDA Committee- Stock exchanges may have a conflict of interest if they carry out market regulation of competing trading systems. The conflicts could be exhibited in various ways. Since the primary objective of privatized stock exchange owners is to maximize profit and shareholder value for the stock exchange owners, there is an incentive to cross-subsidize the regulation of their own market by allocating higher regulatory costs to competing ATSs. At the minimum, this creates a perception of bias which will frustrate the formation of ATSs. The Committee recommends that the regulation of market activity on all stock exchanges and competing trading systems be transferred to an independent national SRO. It is not enough to hive off the market regulation function from an exchange and place is under a nominal corporate umbrella. The Committee urges the exchanges and the securities industry jointly to rise to the challenge and begin immediately a process of designing a workable model that can be implemented quickly. Having reached this conclusion regarding market regulation, it would appear to be reasonable and suggest that market regulation and member regulation should be recombined. Stock exchanges would continue to provide a marketplace to trade securities, maintain a listing function and the regulation of the listing process, and provide a liquidity guarantee (specialist/RT role). The transfer of market regulation into an arm’s length SRO would also enable the stock exchanges to focus on ensuring they retain their advantage as the foremost and principal marketplaces for Canadian equities and also on the listing function. Versus- It is likely that each exchange will submit that it should assume surveillance responsibilities for those securities that are listed on its facility. Absent choice of exchange for this service, surveillance fees charged by the exchange could become an alternative means for an exchange to impede competition from the ATS. If ATSs are required to subscribe for surveillance services from an exchange, and the exchange has a monopoly over the provision of the service, to address conflicts of interest, an independent body should be vested with the authority to regulate the fees charged by the exchange. If surveillance of the ATS is to be performed by the exchange, it will be essential that the surveillance function be performed in a manner that is beyond the influence of, and is inaccessible to, the entity responsible for the for-profit business of the exchange. Versus is not persuaded that sufficient walls can be built around the surveillance division of the exchange to permit true independent review free of conflict of interest where confidentiality of proprietary information can be observed. The surveillance of the ATS should be performed by the SRO of which the ATS is a member. The IDA is positioned to serve as the primary SRO for ATSs that elect to be regulated pursuant to the ATS rules and the surveillance function should be vested in the IDA instead of the exchange. VSE- The VSE has developed an integrated approach to market regulation that has proven to be effective in regulating the junior market. At a minimum, ATSs

	should be required to link, for regulatory purposes, to the exchange where the securities they trade are listed. The needs of the retail venture market in Canada are different in some respects from those of the senior markets. Securities traded are often relatively illiquid and the listed companies themselves require a significant degree of oversight and regulation. Bloomberg- Bloomberg supports a coordinated approach initiated by the CSA. Investor’s Group- ATSs should not be required to contract with an exchange in order to list a security- exchanges compete with ATSs. Instinet- An ATS should not be compelled to contract for market regulation services from the principal market. It should have a choice. TraderDirect- Since ATSs would be members of the IDA, would the OSC consider the IDA to be “an approved agent”? Bank of Canada- The problem with the proposal is that exchanges have only regulated trading in equity securities. Given that IDBs will be considered ATSs under the proposal, exchanges are likely to be ill suited to regulate trading in fixed income securities. Ontario Teachers’ Pension Board- It is expected that the TSE will propose they be the consolidator and regulator of ATSs. The TSE has resisted change and been steadfast in its opposition to ATSs and crossing networks. ATSs will require independent oversight from either the IDA or a new advisory group. Response: There are issues of conflict of interest to consider if exchanges are performing market regulation on behalf of ATSs. There are also cost issues to consider if multiple market regulators are performing surveillance and enforcement rather than one market regulator. Further consideration of this issue is required.
E. MISCELLANEOUS
1. Pilot Trading Systems	TSE- The proposal should be amended to include an equivalent to the SEC’s Form Pilot which allows exchanges to establish their own ATS-type trading systems without prior SEC approval. Full oversight does not begin until the pilot system meets certain volume thresholds or has been in operation for two years. Response: All jurisdictions indicated that they would consider granting exemptions for appropriate systems developed by an exchange for an interim period. The way that the requirements work in each jurisdiction will be considered on a local basis.
2. Central Limit Order Book	Institutional Equity Traders Association- Believe a strong Central Limit Order Book must be established in order to prevent further market fragmentation in the Canadian market. This should be put in place before outside competition from ATSs in introduced.

	Response: Some parties suggested the establishment of a central limit order book. The members of the CSA considered this issue and are of the view that, as a result of the exchange restructuring, it is best at this time not to introduce a central limit order book. In order to minimize fragmentation, the data consolidator and market integrator have been proposed.
3. Jurisdiction (Domestic)Question 7: What types of activities should lead the CSA to the conclusion that an ATS is carrying on business in a jurisdiction?Question 8: What limitations should be placed on the ATS’ activities in a dealers’ jurisdiction if the CSA adopts the Home Jurisdiction Approach?Question 9: Are there any alternative approaches that should be considered by the CSA?	TSE- With respect to domestic ATSs, the TSE urges the CSA to wait until the regulatory regime for oversight of exchanges following their realignment along discrete business lines is finalized before establishing domestic registration requirements for ATSs. The model that the CSA adopts for exchanges should be the same one that it applies to ATSs. If it is not, the exchanges could be at a competitive disadvantage because they would have to deal with multiple commissions on issues that arise while an ATS would not. Joint Exchanges- The CSA should wait until the current market restructuring is completed prior to establishing new registration requirements for ATSs. VSE- The CSA should use the same oversight model for ATSs that it will use for the exchanges following realignment. Investor’s Group- The key factor in determining whether an ATS is carrying on business in a jurisdiction is dependent on the nature of contact with investors in that jurisdiction. The “home jurisdiction approach” makes sense but the scope should be broader. It should apply not only where the ATS deals only with dealers but with institutional investors as well. Instinet- A sensible approach for ATSs that are subject to substantial home jurisdiction would be to have a relatively light form of registration available with requirements similar to those in the “international dealer” category of registration in Ontario supplemented by ATS reporting requirements. This would enable regulators in each province to track the activities of different systems and registration requirements would not be excessively onerous. The test in the proposal for accepting home jurisdiction regulation is that the ATS’s only contact be with dealers registered in the particular jurisdiction. The ATS will at the very least be indirectly marketed to investors by the dealers with which the ATS deals. Over time, the method of differentiating between home jurisdiction recognition ATSs and ATSs that need direct regulation will become difficult and unworkable. Ontario Teachers’ Pension Board- An ATS is carrying on business in a jurisdiction if it is providing a resident with access to its trading systems or services. Should be cautious on Home Jurisdiction since Home Jurisdiction may not only be another Canadian jurisdiction but may also be a foreign jurisdiction. If care is not exercised, there may be a move to seek out the most beneficial Home Jurisdiction. Response: The CSA are of the view that ATSs are different than exchanges. With respect to domestic jurisdiction, it is proposed that if an ATS (that is
	registered in one jurisdiction in Canada) is dealing with a dealer in another jurisdiction, there is no need to register in the other jurisdiction. However, if an ATS (that is registered in one jurisdiction in Canada) is dealing with an investor (either institutional or retail), the ATS should be required to register in that jurisdiction.
4. Jurisdiction- ForeignQuestion 10: Should the foreign ATSs be required to be a regulated entity in its home jurisdiction? If so, must it be regulated under the securities laws of the home jurisdiction?Question 11: Should access to the foreign ATS be through a Canadian dealer contacting a dealer that is regulated in the foreign jurisdiction (home jurisdiction of the foreign ATS?Question 12: Should this approach be limited to acceptable home jurisdictions, and if so what jurisdictions should be approved as acceptable?	TSE- Unless there are reciprocal arrangements with the foreign jurisdiction, foreign ATSs should not be allowed to access Canadian markets. Allowing such access creates an unlevel paying field where US markets will have access to Canadian dealers when Canadian exchanges and ATSs do not have equivalent access to US dealers. Joint Exchanges- Unless there are reciprocal arrangements with the foreign jurisdiction, foreign ATSs should not be allowed to access Canadian markets. VSE- If the CSA permits foreign ATSs and markets to allow disintermediated access to their trading system to Canadian dealers, the exchanges will be at a great competitive disadvantage if they do not have equivalent access to the ATSs home jurisdiction. Investor’s Group- The “home jurisdiction approach” should not be limited to ATSs regulated elsewhere in Canada but to ATSs regulated in any foreign jurisdiction, at least those that have a credible regulatory system. Versus- Exempting foreign ATSs from Canadian regulation under the ATS proposal would undermine the primary objective of the proposal, which is to preserve a viable, liquid, efficient, and integrated capital market in Canada that can operate competitively within the global marketplace. Foreign ATSs carrying on business in Canada should be subject to the ATS proposal in the same manner and to the same extent as Canadian ATSs. The Home Jurisdiction Approach should not be adopted. CIBC World Markets- The home jurisdiction approach is inappropriate so long as Canadian exchanges and ATSs do not enjoy reciprocity under the US regulatory regime. Even if the home jurisdiction approach is to be eventually adopted, we would caution the CSA that to do so too early would be extremely detrimental to the Canadian market because it would allow large, well-established ATSs to solicit business in Canadian before Canadian ATSs can establish themselves. IDA Committee- The Committee’s general sense was that foreign ATSs providing investors and dealers with terminals to trade securities should be subject to some form of domestic regulation. The Committee concluded, to the extent possible, reciprocity should be the guiding principle to imposing regulation on foreign ATSs. Instinet- Agree with an approach in which the home jurisdiction provides active regulation and thinks this is an acceptable basis for the local Canadian regulator to defer to a foreign regulator. If the approach is limited to acceptable home

	jurisdictions, two appropriate jurisdictions would be the US and the UK because they have sophisticated securities regulators, important capital markets and have devoted considerable thought to the appropriate regulation of trading systems. Bloomberg- Bloomberg supports the home jurisdiction approach. In addition, if the ATS’s only contact with Canadian entities occurs when the ATS deals with registered broker-dealers or banks that are trading for their proprietary accounts or customers’ accounts and the ATS does not deal directly with Canadian customers, then the regulation of the broker dealer and banks should suffice. Ontario Teachers’ Pension Board- A foreign ATS handling Canadian stocks should not be exempt from Canadian regulation and the activity should be reported to the data consolidator. With respect to non-foreign Canadian stocks, access to the foreign ATS should be through a Canadian dealer contacting a dealer regulated in the foreign jurisdiction. Institutional investors will want the ability to trade non-Canadian stocks through foreign ATSs. Response: The key issue to consider is reciprocity. With respect to foreign jurisdiction, it is proposed that a foreign ATS be required to register in one jurisdiction in Canada (then the position set out above applicable to domestic jurisdiction would apply).
5. Jurisdiction- Order routing and remote access Question 13: Should the availability of the Home Jurisdiction Approach depend on the activities of the registered dealer in the jurisdiction where the investor is located? Question 14: Should the answer to the above question depend upon whether the home jurisdiction is another Canadian jurisdiction or a foreign jurisdiction? Question 15: Should the availability of the Home Jurisdiction Approach depend on whether the Canadian registered dealer is an affiliate of the ATS? Question 16: Should remote access be limited to dealers which are members of a self-regulatory organization?	Instinet- If an order routing capability only is in question and the customers are relatively sophisticated, a limited licence such of that as an international dealer may well be appropriate. Ontario has a record of experience with the international dealer license and, in the absence of a finding that it has been inappropriate, there does not seem to be any need to revisit this matter. Bloomberg- In the case of a remote access ATS, Canadian dealers and institutional users of the ATS will receive adequate regulatory protection if the home jurisdiction approach is adopted. If a foreign ATS is carrying on business within Canada, the ATS should become subject to Canadian regulation in the manner that is contemplated in Regulation ATS. The CSA should limit the home jurisdiction approach to jurisdictions with which the CSA is familiar and which have securities protections comparable to those in Canada. Ontario Teachers’ Pension Board- If an ATS is handling Canadian stocks the jurisdiction should be Canadian. If an ATS is handling foreign stocks, investors will need to be aware of the home jurisdiction for the settlement of disputes. Remote access should be limited to dealers that are members of an SRO. Response: See response under foreign jurisdiction set out above.
6. Clearing and Settlement	CDS- While there is discussion of ATSs having access to CDS and CDCC, there is no explicit requirement that the trades from an ATS be routed to a recognized clearing agency for clearing and settlement. It is inferred that direct reporting of trades to the clearing agency may be done by the ATS itself or by the ATS using the services of a service bureau as an agent, however, further discussion would be beneficial. The discussion paper encourages marketplaces to work with CDS and service bureaus to facilitate improvements to the flow of trade information. CDS concurs that discussion and cooperation among industry participants is vital and would like to emphasize their interest in participating. Response: A requirement will be added to provide that all trades from an ATS be reported, confirmed and settled through a clearing agency listed in Appendix B of the Marketplace Instrument.
7. Regulation of technology vendor	Instinet- Where a vendor sells technology to an exchanges and the technology vendor enters into a joint venture, both entities should be treated as operators of the ATS. The technology vendor should not escape regulation as an ATS. Response: All systems will be regulated directly or indirectly (if, for example, technology is licensed to exchanges).
8. Application to Fixed Income Markets	TraderDirect- The proposal would apply to IDBs. As the IDB market exists today, it does not fit within this concept since the IDBs presently operate independently of each other. The proposal should take into account the significant differences between the equity and fixed income markets. The SEC excluded the US government debt markets from the policy in relation to ATSs. Bank of Canada- As opposed to most equity markets, fixed income markets in Canada are multiple dealer (or quote driven) markets. In this setup, dealers (market makers) intermediate all transactions. There exist two parallel and, in effect, separate markets: a public trading environment where customers trade exclusively (and bilaterally) with market makers (the customer or public sphere) and an interdealer trading environment, where dealers trade among themselves exclusively (the interdealer sphere). The interdealer sphere is segmented further into two: Dealers have the choice of either trading bilaterally with each other or trading indirectly and anonymously with each other via an interdealer broker. Given this structure, customers cannot transact with each other but instead must trade with a dealer of their choice and dealers have exclusive access to interdealer brokers. Because trading in fixed income securities takes place via multiple dealers and in two separate trading spheres, there does not exist a primary or central marketplace as is the case for most Canadian equity markets. IDA Capital Markets Committee- There are significant structural differences between domestic debt and equity markets which mean that in many respects the current CSA proposal is unlikely to be applicable to debt markets. Debt markets have historically been principal markets in which prices are determined by market makers through the interaction of buy and sell orders posted by these dealers. The Committee would like clarification on the process for implementing rules for

Canadian debt markets, and the relationship between the CSA, the Bank of Canada, the Department of Finance and the IDA in supervising and monitoring these markets. Response: The CSA have reviewed the issue of applicability of the ATS proposal to fixed income markets. IDBs have been excluded from the definition of marketplace. However, they must provide information to the information processor for the purposes of transparency. Due to the structure of the fixed income market, IDBs will not be subject to the market integration provisions.