“Best Execution” and ​“Best Price” Obligations For Securities Listed On TSX Venture Exchange”

This IIROC Notice provides a reminder to Participants respecting their best execution and best price obligations under the Universal Market Integrity Rules (“UMIR”) as a result of securities which are listed on the TSX Venture Exchange (“TSXV”) trading on other marketplaces.

“Best Execution” and “Best Price” Obligations under UMIR

This IIROC Notice does not change the guidance that IIROC has previously issued on how a Participant would comply with their “best execution”1 and “best price”2 obligations for securities trading on multiple marketplaces. This IIROC Notice simply reminds Participants of their obligations given that securities listed on the TSXV now trade on other marketplaces.

Under Rule 5.1 of UMIR, the obligation to monitor information on orders entered on and trades executed on marketplaces trading TSXV-listed securities falls to the Participant handling the client order.  Participants are expected to take into account order and trade information from all marketplaces that trade the same securities when discharging their best execution obligations. Where appropriate, a Participant who does not have trading access to a particular marketplace would be expected to make arrangements with another dealer who is a Participant of the particular marketplace. In the view of IIROC, a Participant would be expected to make such arrangements if the particular marketplace had demonstrated that there is a reasonable likelihood that the marketplace will have liquidity for a specific security relative to the size of the client order.

IIROC is also of the view that a Participant in discharging its best execution obligation should consider possible liquidity on marketplaces that do not provide transparency of orders in a consolidated market display if:

• the displayed volume in the consolidated market display is not adequate to fully execute the client order on advantageous terms for the client; and
• the non-transparent marketplace has demonstrated that there is a reasonable likelihood that the marketplace will have liquidity for the specific security.

The “best price” obligation under Rule 5.2 of UMIR requires a Participant to make “reasonable efforts” to fill better-priced orders displayed on a “protected marketplace”3 at the time the Participant executes at an inferior price on another marketplace or foreign organized regulated market. IIROC will accept that a Participant has made “reasonable efforts” to comply with the “best price” obligation if the Participant has:

• entered the order on a marketplace that will ensure compliance with the “best price” obligation;
• used an acceptable order router; or
• provided the order to another Participant for entry on a marketplace.

If a Participant uses another means to enter an order on a marketplace, IIROC will determine whether a Participant has made “reasonable efforts” to obtain the best available prices on a “protected marketplace”. Each Participant must adopt policies and procedures to ensure compliance with its “best price” obligation, which will include the relevant factors upon which it is relying in making trading decisions. IIROC has indicated that each Participant must review its policies and procedures on an ongoing basis to reflect changes to the trading environment and market structure (which would include the fact that securities listed on TSXV now trade on multiple marketplaces).

Trading of TSXV-Listed Securities on Multiple Marketplaces

On March 12, 2007, Liquidnet Canada Inc. (“Liquidnet”) became the first ATS to trade securities listed on the TSXV. Trading of TSXV-listed securities followed on MATCH Now on September 3, 2008 and on Omega ATS Limited (“Omega”) on November 17 2008. However, by December 31, 2008, only 223 trades in a security listed exclusively on TSXV had been made on an ATS. The full TSXV stock list became eligible for trading on Pure Trading on February 27, 2009 and on Alpha Trading Systems (“Alpha”) on March 30, 2009. During the first quarter of 2009, a total of 1,884 trades with a volume of 26,655,998 shares in TSXV-listed securities occurred on these markets but, during the second quarter of 2009, the number of trades expanded significantly to 19,342 trades with a volume of 156,763,422.

While more than 98% of trades and volume in TSXV-listed securities continued to be made through the TSXV during the first six months of 2009, the increase in trading activity in TSXV- listed securities on the ATSs indicates that trading opportunities in TSXV-listed securities are increasingly available on the ATSs. Participants must take this increased liquidity on multiple marketplaces into account when making determinations with respect to their “best execution” and “best price” obligations under UMIR. In particular, IIROC expects each Participant will monitor the changes in the liquidity available on each marketplace for securities listed on the TSXV and that each Participant will review their policies and procedures for both “best execution” and “best price” to take account of any changes in the liquidity patterns.

The following tables set out more detailed information on trading of TSXV-listed securities during the first six months of 2009, including the number of trades and the associated volume.

• 1See Market Integrity Notice 2006-017 – Guidance – Securities Trading on Multiple Marketplace (September 1, 2006) under the sub- heading “Rule 5.1 – Best Execution of Client Orders”.
• 2See IIROC Notice 09-0107 - Rules Notice – Notice of Approval – UMIR – Provisions Respecting the “Best Price” Obligation (April 17, 2009), IIROC Notice 09-0108 - Rules Notice – Guidance Note – UMIR – Specific Questions Related to the “Best Price” Obligation (April 17, 2009) and Market Integrity Notice 2008-010 – Guidance –Complying with “Best Price” Obligations (May 16, 2008).
• 3Under UMIR, a “protected marketplace” means a marketplace that:
  - disseminates order data in real-time and electronically through an information processor or one or more information vendors in accordance with the Marketplace Operation Instrument;
  - permits dealers to have access to trading in the capacity as agent;
  - provides fully-automated electronic order entry; and
  - provides fully-automated order matching and trade execution.
  Of those marketplaces currently trading TSXV-listed securities, each of TSXV, Pure Trading, Alpha and Omega qualify as a “protected marketplace” while Liquidnet and MATCH Now do not qualify as a “protected marketplace”.