April 11, 2014

The Canadian Securities Exchange (CSE) is proposing amendments to Rule 4 Trading of Securities and related definitions (the “Amendments”).  The purpose of the Amendments is to provide more clarity about the role of Market Makers and introduce a Guaranteed Fill functionality for client orders and automatic execution for odd lot orders.  The Board of Directors of the CSE has approved the publication of the Amendments for public comment.

The Amendments also include housekeeping amendments to reflect the change in the operating name of the Exchange.  By separate notice, all housekeeping amendments to the rules will be effective prior to the public interest rules included herein.

Comments may be provided no later than May 12, 2014 and should be addressed to:

Mark Faulkner
Vice President, Listings and Regulation
CNSX Markets Inc.
220 Bay Street, 9th Floor
Toronto, ON, M5J 2W4
Fax: 416.572.4160
Email: Mark.Faulkner@thecse.com

A copy should be provided to:

Susan Greenglass
Director, Market Regulation
Ontario Securities Commission
Suite 1903, Box 55
20 Queen Street West
Toronto, ON, M5H 3S8
Fax: 416.595.8940
Email: Marketregulation@osc.gov.on.ca

Terms not defined in this Notice are defined in the CNSX Rules.

Description of the Changes

The world “listed” will be deleted from the definitions of “Market Maker” and “Market Maker Security” so that the definitions and rules apply to all securities traded on the Exchange.  The definition of “Market Maker Security” will be further amended to reflect the change to a single designated Market Maker per security.

New Rule 4-107 Guaranteed Fill Facility will describe the eligibility requirements for the new Guaranteed Fill (GF) functionality that will provide automatic fills by the designated Market Maker for client orders that include an eligibility tag.  These fills will be executed at the bid or offer up to set GF amount for that security in the order books.  This functionality will be available for odd lot, mixed lot and board lot orders.

4-112 Appointment of Market Makers will be amended to describe the general performance criteria that will be considered by the Exchange, and include provisions for withdrawing approval or waiving notice periods.

When considering a Market Maker appointment the Exchange will consider the service level commitment proposed by the Market Maker, that being the Guaranteed Fill volume and the proposed bid/ask spread goal, and any available performance history from that Market Maker.

4-113 Quotations will be renamed “Commitments and Performance” to reinforce the commitment to

1. Maintaining a bid/ask spread goal;
2. Providing a Guaranteed Fill;
3. Providing automatic odd lot execution, so that all incoming market or better limit odd lot orders will be auto traded at the bid/ask if they     cannot be filled by booked odd lot orders;
4. Ensuring a reasonable bid/ask in the context of current conditions;
5. Undergoing periodic performance reviews.

Expected Implementation Date: June 2, 2014

Rationale and Analysis

Guaranteed Fill – GMF was designed to improve fill quality for client orders through the use of traditional market makers.  This auto execution function will benefit retail-sized orders and dealers will see increased trade sizes helping reduce clearing charges.

Odd Lot Auto Trading- By implementing this significant change our dealers will benefit from better-priced and timelier odd lot trading, easing the burden associated with this type of trading and providing better fills for retail clients attempting to trade odd and mixed lots.    

Expected Impact

Guaranteed Fill/Odd Lot Auto Trading should facilitate simplified execution, benefit smaller dealers and add more liquidity for Listed Issuers.

None of the changes should introduce any additional costs to dealers, except for Market Makers who may incur minor costs in preparation for auto execution.

Compliance with Ontario Securities Law

There will be no impact on the Exchange’s compliance with Ontario securities law.  The changes do not alter any requirements for fair access and if anything, further assist with the maintenance of fair and orderly markets.

Consultation

These changes are being made to satisfy demands by dealers and their retail clients, by adding these tools CSE will assist dealers with compliance and allow them to improve fill quality while playing an active role in Market Making activities. Overall the proposed changes have been met with positive feedback. 

Technology Changes

For Dealers and technology vendors modifications would be minimal. A Dealer acting as a formal Market Maker and accepting responsibility for auto execution must include on their orders the market making regulatory tag currently in use. All of the above changes are currently available in the CSE test environment for vendors and dealers. 

Other Markets or Jurisdictions

The Toronto Stock Exchange has a Market Maker program that offers a guaranteed fill function and automatic odd trading in securities with a designated market maker.

Questions

Questions or comments about this notice or the amendments to Rule 4 may be directed to: 
Mark Faulkner
Vice President, Listings & Regulation
416.367.7341 or Mark.Faulkner@thecse.com 

Appendix A

Blacklined Text of the Amendments

“Market Maker” means a CNSX Dealer approved as such for a particular listed security.

“Market Maker security” means a listed security for which one or more CNSX Dealers have has been appointed as Market Maker.

4-107  [Repealed]  Guaranteed Fill Facility

(1)  Eligibility

An order that is a client order for a security that is, in its entirety, for a volume less than or equal to the Guaranteed Fill volume on that security is eligible for a guaranteed fill, provided that the order is not:

a)    One of multiple orders for the same client on the same day;

b)    An order entered by a DEA client, unless the DEA client is a broker acting as an agent for retail client order flow;

c)    An order entered on behalf of a U.S. dealer, unless

1. the order is for a client of the U.S. dealer; and
2. The Dealer first confirms the order is for a client of the U.S. dealer; or

d)    For a client that is generally involved in active and continuous trading on a daily basis

(2)  Fills that occur in violation of the eligibility requirements above may be cancelled at the request of the Market Maker.  The Exchange may cancel or amend any trades deemed to be improper use of the Guaranteed Fill facility.

4-112  Appointment of Market Makers

(1)       A CNSX Dealer wishing to act as a Market Maker in a CNSX lListed Ssecurity shall file notice thereof with CNSX the Exchange on the prescribed form and shall become obligated to perform the functions of a Market Maker upon approval by CNSX the Exchange.  Before granting such approval, the Exchange will consider

(a)          The Guaranteed Fill volume proposed by the Market Maker;
(b)          The proposed goal for the average bid/ask spread;

(c)          Performance history as a Market Maker.

(2)       Subject to Rule 4-101, a CNSX Dealer approved as a Market Maker shall appoint a Primary Trader to perform the obligations set out in these Rules and an Alternate Trader to act in the absence of the Primary Trader.

(3)       A Dealer approved as a Market Maker must maintain a two-sided continuous quotation for a period of not less than three consecutive calendar months and must give CNSX the Exchange at least 30 days advance notice of its intention to relinquish any Market Maker Obligations.

(4)       A CNSX Dealer which ceases to act as a Market Maker in respect of a CNSX lListed Ssecurity may not become a Market Maker in that security for a period of 30 days.

(5)       CNSX Markets The Exchange may in its sole discretion designate a CNSX Dealer as a Market Maker in respect of a CNSX lListed Ssecurity where the CNSX Dealer’s trading activities suggest the market will be better served by the CNX Dealer assuming the responsibilities of a Market Maker.

(6)       The Exchange may in its sole discretion withdraw the approval as a designated Market Maker on one or more securities with or without notice.

(7)       The Exchange may in its sole discretion waive the three month requirement or the notice period of 4-112(3) or the waiting period described in 4-112(4).

             

4-113  Quotations Commitments and Performance

 

(1)          Two-Sided Quotations. A Designated Market Maker shall

(a)          buy and sell such security for its own account on a continuous basis, and

(b)        enter and maintain ensure two sided quotations in the CNSX Trading System. within the accepted bid/ask spread goal.

 

(2)          Minimum Size of Guaranteed Fill. A Designated Market Maker’s displayed quotation sizeGuaranteed Fill volume shall be for at least onetwo Board Lots less one share on each side of the market and may be for larger Board Lot multiples thereof.

(3)       Firm QuotationsOdd Lots. A Designated Market Maker that receives a treadeable client order to buy or sell from another CNSX Dealer shall execute the order to at least the size displayed on the bid or offer (as the case may be). A better priced limit order or market order that is for a volume less than a Board Lot, or the portion of a tradable order that is less than a Board Lot, shall be filled automatically by the Market Maker provided that the Board Lot portion of such an order is filled first.

(4)       Quotations Reasonably Related to the Market. A Market Maker shall enter and maintain quotations that are reasonably related to the prevailing market.

(5)       Reasonably Competitive Quotations. A Market Maker must enter reasonably competitive quotations for a security into the CNSX System, in the context of the market and over time, that generally do not exceed the average of all Maker spreads in that security over time. The Exchange will periodically review the performance of each Market Maker with respect to bid/ask spread maintenance and other relevant measures, as determined by the Exchange from time-to-time.

 

Appendix B

Amended Text

“Market Maker” means a CNSX Dealer approved as such for a particular security.

“Market Maker security” means a security for which CNSX Dealer has been appointed as Market Maker.

4-107  Guaranteed Fill Facility

(1) Eligibility

An order that is a client order for a security that is, in its entirety, for a volume less than or equal to the Guaranteed Fill volume on that security is eligible for a guaranteed fill, provided that the order is not:

a)    One of multiple orders for the same client on the same day;

b)     An order entered by a DEA client, unless the DEA client is a broker acting as an agent for retail client order flow;

c)    An order entered on behalf of a U.S. dealer, unless

 i)  the order is for a client of the U.S. dealer; and
ii)  The Dealer first confirms the order is for a client of the U.S. dealer; or

d)   For a client that is generally involved in active and continuous trading on a daily basis

(2)  Fills that occur in violation of the eligibility requirements above may be cancelled at the request of the Market Maker.  The Exchange may cancel or amend any trades deemed to be improper use of the Guaranteed Fill facility.

4-112  Appointment of Market Makers

(1)       A Dealer wishing to act as a Market Maker in a Listed Security shall file notice thereof with the Exchange on the prescribed form and shall become obligated to perform the functions of a Market Maker upon approval by the Exchange.  Before granting such approval, the Exchange will consider

(a)  The Guaranteed Fill volume proposed by the Market Maker;

(b)  The proposed goal for the average bid/ask spread;

(c)  Performance history as a Market Maker. 

(2)       Subject to Rule 4-101, a Dealer approved as a Market Maker shall appoint a Primary Trader to perform the obligations set out in these Rules and an Alternate Trader to act in the absence of the Primary Trader. 

(3)       A Dealer approved as a Market Maker must maintain a two-sided continuous quotation for a period of not less than three consecutive calendar months and must give the Exchange at least 30 days advance notice of its intention to relinquish any Market Maker Obligations.
 

(4)       A Dealer which ceases to act as a Market Maker in respect of a Listed Security may not become a Market Maker in that security for a period of 30 days. 

(5)       The Exchange may in its sole discretion designate a Dealer as a Market Maker in respect of a Listed Security where the Dealer’s trading activities suggest the market will be better served by the Dealer assuming the responsibilities of a Market Maker. 

(6)       The Exchange may in its sole discretion withdraw the approval as a designated Market Maker on one or more securities with or without notice. 

(7)       The Exchange may in its sole discretion waive the three month requirement or the notice period of 4-112(3) or the waiting period described in 4-112(4).      
       

4-113  Commitments and Performance

 (1)          Two-Sided Quotations. A Designated Market Maker shall 

(b)  buy and sell such security for its own account on a continuous basis, and

(c)  ensure two sided quotations in the Trading System Within the accepted bid/ask spread goal. 

(2)          Minimum Size of Guaranteed Fill. A Designated Market Maker’s Guaranteed Fill volume shall be for at least two Board Lots less one share on each side of the market and may be for larger Board Lot multiples thereof. 

(3)       Odd Lots. A better priced limit order or market order that is for a volume less than a Board Lot, or the portion of a tradable order that is less than a Board Lot, shall be filled automatically by the Market Maker provided that the Board Lot portion of such an order is filled first. 

(4)       Quotations Reasonably Related to the Market. A Market Maker shall enter and maintain quotations that are reasonably related to the prevailing market.

(5)       The Exchange will periodically review the performance of each Market Maker with respect to bid/ask spread maintenance and other relevant measures, as determined by the Exchange from time-to-time.