1. A Participant that receives a client order for 50 standard trading units or less of a security with a value of $100,000 or less may execute the client order against a principal order or non-client order at a better price provided the Participant has taken reasonable steps to ensure that the price is the best available price for the client under prevailing market conditions.
2. Subsection (1) does not apply if the client has directed or consented that the client order be:
   1. a Call Market Order;
   2. an Opening Order;
   3. a Market-on-Close Order;
   4. a Volume-Weighted Average Price Order;
   5. a Basis Order;
   6. a Closing Price Order;
   7. a Contingent Derivative Order;
   8. a Net Asset Value Order.
3. Subsection (1) does not apply if the client order has been entered directly by the client of the Participant on a marketplace that does not require the disclosure of the identifier of the Participant in a consolidated market display and the director, officer, partner, employee or agent of the Participant who enters a principal order or a non-client order does not have knowledge that the client order is from a client of the Participant until the execution of the client order.

POLICY 8.1 – CLIENT PRINCIPAL TRADING

Part 1 – General Requirements

Rule 8.1 governs client-principal trades. It provides that, for trades of 50 standard trading units or less, a Participant trading with one of its clients as principal must give the client a better price than the client could obtain on a marketplace. A Participant must take reasonable steps to ensure that the price is the best available price for the client taking into account the condition of the market. If the security is traded on more than one marketplace, the client must receive, when the Participant is buying, a higher price than the best bid price, and, if the Participant is selling, the client must pay a lower price than the best ask price.

For client-principal trades greater than 50 standard trading units, the Participant may do the trade provided the client could not obtain a better price on a marketplace in accordance with its best execution obligation under Part C of Corporation Rule 3100 – Best Execution of Client Orders. The Participant must take reasonable steps to ensure that the best price is obtained and the price to the client is justified by the condition of the market.

Part 2 – Legal Aspects of the Client-Principal Relationship

A Participant owes a fiduciary duty to its clients. This duty and investors’ trust in our Participants are fundamental to investor confidence in the integrity of the market. In the Market Regulator’s view, this relationship of trust arises where there is reliance by the client on the Participant’s expertise in securities matters. From the point of view of both the client and the Participant, the fiduciary responsibility exists regardless of the legal form of the transaction. In other words, an investor who relies on the expertise of a Participant expects the Participant to act in the investor's best interests regardless of whether the Participant is acting as agent or as principal. The legal framework underpinning client-principal trades was stated in the 1965 report of the Royal Commission on the Windfall Co. scandal:

An agent must conduct himself so that the interest of the person in whose behalf he is acting is not brought into conflict with his personal interest. An agent may not make for himself any deal which could have been made for his client within the scope of the client’s instructions; if he does, he is assumed to have been acting on his client’s behalf and the client is entitled to the benefit of the transaction. An agent must disclose to the client any fact known to the agent which would be likely to operate on the client’s judgment. An agent may not, in connection with his client’s business, make a secret profit for himself.

These restrictions flow from the recognition of the serious conflicts inseparable from the agency relationship, and from a corresponding recognition that every such conflict must be resolved in favour of the client. A principal trade may be subject to attack if it appears that the Participant did not act to the best advantage of its client even if the Participant complies with the technical requirements of the Rule. For example, if the principal account profited from the trade by unwinding the position again soon after the principal trade was made, or if the Registered Representative receives a higher commission than for agency transactions of a similar size involving similar securities, the Participant will find it more difficult to justify its actions. Participants should obtain their own legal advice as to the propriety of their client-principal trading practices. The following are considerations in any client-principal trade:

Consent — At common law, the prior informed consent of the client must be obtained before the agent may act as principal. This is impractical in the context of trading securities on a marketplace, where at the time of receipt of the client's order the Participant will likely not know who will be on the other side. If the Participant, through the Registered Representative or other employee knows that the firm or a non-client of the firm will or probably will take the other side, the client's consent should be obtained. In particular, if the Registered Representative wishes to take the other side of the trade with their client, the client must be informed and consent to the trade in advance. Such consent must be specific to that trade and cannot be in a general consent to any future trades with the Registered Representative. As promptly as possible following the execution of a principal trade, the client should be advised that all or part of the securities taken or supplied were from an account in which the Participant or a non-client of the Participant has an interest. This advice would form part of the usual discussion that occurs when a Registered Representative confirms to the client that the client’s order has been filled. In addition, the written confirmation must disclose that the order has been filled in a principal transaction.

Nature of the Client — Some clients are in greater need of protection from the potential conflict of interest in client-principal trades. The onus on the Participant usually will be reduced if the client is a fully informed institutional client with regard to the state of the market. Sophisticated institutional clients are able to judge whether a specific net price is appropriate in the context of the market. If there was no prior discussion with the client concerning executing the client's order in a client-principal trade, or if there are no standing instructions on handling of orders, the Participant must judge whether any steps need be taken, taking into account the size of the order and other circumstances, to ensure that a better price is not available. To a large degree this will depend on the depth of the market and normal liquidity of the security.

Suitability — Compliance with the client-principal trading rules does not relieve a Participant of its suitability and "know your client" obligations. As with any other trade, Participants must ensure that the trade is suitable for the client, even if the best possible price has been obtained.

Facilitation Accounts — The rules do not apply to a client-principal trade where the inventory account was used solely to facilitate the execution or confirmation of a client order (for example, an inventory accumulation account used to give an institutional client a single average-price confirmation). In these cases, the client is the beneficial owner of the position in the inventory account at all times.

Refusal by Client — Participants should ensure that procedures are in place to identify orders that should not be effected on a principal basis. This is necessary to deal with situations where clients notify a Participant that they do not consent to principal trading generally or to particular principal trades.

Part 3 – Factors in Determining “Best Available Price”

The price of the principal transaction must also be justified by prevailing market conditions. Participants should consider such factors as:

• prices and volumes of the last sale and previous trades;
• direction of the market for the security;
• posted size on the bid and offer;
• the size of the spread; and
• liquidity of the security.

For example, if the market is $10 bid and $10.50 asked and a client wants to sell 1,000 shares, it would be inappropriate for a Participant to do a principal trade at $10.05 if the security has been trading heavily at $10.50 and there is strong bidding for the security at $10 compared to the number of securities being offered at $10.50. The condition of the market suggests that the client should be able to sell at a better price than $10.05. Accordingly, the Participant as agent for the client should post an offer at $10.45 or even $10.50, depending on the circumstances. The desire of the client to obtain a fill quickly is always a consideration.

Of course, if a client expressly consents to a principal trade on a fully-informed basis, following the client’s instructions will be reasonable.

In determining the “best available price”, Participants should consider the price and size of orders displayed on marketplaces other than protected marketplaces if such information is available or known to the Participant. Specifically, we expect an employee of a Participant to use all order price information that is available or known to that employee when determining the “best available price”. For example, an employee that has access to price information from both protected and unprotected marketplaces would be in compliance with the requirement to determine the “best available price” only if all price information from both protected and unprotected marketplaces was considered when executing a principal order or non-client order with a client order. However, a Participant will be considered not to have complied with Rule 8.1 if an employee executes a principal order or non-client order with a client order at a better price which is inferior to the price that would have been available to the client on a displayed marketplace that is not a protected marketplace and the employee executes, in whole or in part, with the order displayed on the marketplace that is not a protected marketplace.

1. A Participant that is a member, user or subscriber may:
   1. grant direct electronic access or enter into a routing arrangement provided that the Participant has:
      1. established standards that are reasonably designed to manage, in accordance with prudent business practices, the Participant’s risks associated with providing direct electronic access to a client or implementing a routing arrangement with an investment dealer or foreign dealer equivalent,
      2. assessed and documented that the client, investment dealer or foreign dealer equivalent meets the standards established by the Participant, and
      3. executed a written agreement with the client, investment dealer or foreign dealer equivalent; and
   2. not grant direct electronic access if the client is acting and registered as a dealer in accordance with applicable securities legislation.
2. The standards established by the Participant under subsection (1) must include a requirement that the client, investment dealer or foreign dealer equivalent:
   1. has sufficient resources to meet any financial obligations that may result from use of direct electronic access or the routing arrangement;
   2. has reasonable arrangements in place to ensure that all personnel transmitting orders using direct electronic access or the routing arrangement have reasonable knowledge of and proficiency in the use of the order entry system;
   3. has reasonable knowledge of and the ability to comply with all applicable Requirements, including the marking of each order with the designations and identifiers required by Rule 6.2;
   4. has reasonable arrangements in place to monitor the entry of orders transmitted using direct electronic access or the routing arrangement;
   5. takes all reasonable steps to ensure that the use of automated order systems, by itself or any client, does not interfere with fair and orderly markets; and
   6. ensures that each automated order system, used by itself or any client, is tested in accordance with prudent business practices, including initially before use or introduction of a significant modification and at least annually thereafter.
3. The written agreement entered into by a Participant under subsection (1) with the client, investment dealer or foreign dealer equivalent must provide that:
   1. in the case of an agreement for direct electronic access or a routing arrangement:
      1. the trading activity of the client, investment dealer or foreign dealer equivalent will comply with:
         1. all Requirements, and
         2. the product limits or credit or other financial limits specified by the Participant;
      2. the client, investment dealer or foreign dealer equivalent will maintain all technology facilitating direct electronic access or a routing arrangement in a secure manner and will not permit any person to transmit an order using the direct electronic access or the routing arrangement other than the personnel authorized by the client and named under the provision of the agreement referred to in sub-clause (b)(i), or personnel authorized by the investment dealer or foreign dealer equivalent;
      3. the client, investment dealer or foreign dealer equivalent will fully co-operate with the Participant in connection with any investigation or proceeding by any marketplace or the Market Regulator with respect to trading conducted pursuant to direct electronic access or a routing arrangement, including upon request by the Participant, providing access to information to the marketplace or Market Regulator that is necessary for the purposes of the investigation or proceeding;
      4. the Participant is authorized, without prior notice, to:
         1. reject any order,
         2. vary or correct any order entered on a marketplace to comply with Requirements,
         3. cancel any order entered on a marketplace, or
         4. discontinue accepting orders, 
            from the client, investment dealer or foreign dealer equivalent;
      5. the client, investment dealer or foreign dealer equivalent will immediately inform the Participant if the client, investment dealer or foreign dealer equivalent fails or expects not to meet the standards set by the Participant; and
   2. in the case of an agreement for direct electronic access:
      1. the client will immediately notify the Participant in writing of:
         1. the names of the personnel of the client authorized by the client to enter an order using direct electronic access, and
         2. details of any change to the information in sub-clause (A);
      2. the client may not trade for the account of any other person unless the client is:
         1. registered or exempted from registration as an adviser under securities legislation, or
         2. a person conducting business in a foreign jurisdiction in a manner analogous to an adviser and that is subject to the regulatory jurisdiction of a signatory to the International Organization of Securities Commissions’ Multilateral Memorandum of Understanding in that foreign jurisdiction and the order is for or on behalf of a person who is itself a client of the client acting in the capacity of adviser for that person;
      3. if the client trades for the account of any other person in accordance with sub-clause (ii), the client must:
         1. ensure that the orders for the other person are transmitted through the systems of the client before being entered on a marketplace, and
         2. ensure that the orders for the other person are subject to reasonable risk management and supervisory controls, policies and procedures established and maintained by the client;
      4. the Participant shall provide to the client, in a timely manner, any relevant amendments or changes to:
         1. applicable Requirements, and
         2. the standards established by the Participant under subsection (1); and
   3. in the case of a routing arrangement agreement, the investment dealer or foreign dealer equivalent will not allow any order entered electronically by a client of the investment dealer or foreign dealer equivalent to be entered directly to a marketplace unless:
      1. the client’s order is transmitted through the systems of the investment dealer or foreign dealer equivalent, prior to being transmitted through the systems of the Participant for automatic onward transmission to a marketplace or transmitted directly to a marketplace without being electronically transmitted through the system of the Participant, and
      2. the client’s order is subject to reasonable risk management and supervisory controls, policies and procedures established and maintained by the investment dealer or foreign dealer equivalent.
4. A Participant must not allow any order to be transmitted using direct electronic access or through a routing arrangement unless:
   1. the Participant is:
      1. maintaining and applying the standards established by the Participant under subsection (1),
      2. satisfied the client, investment dealer or foreign dealer equivalent meets the standards established by the Participant under subsection (1), and
      3. satisfied the client, investment dealer or foreign dealer equivalent is in compliance with the written agreement entered into with the Participant; and
   2. the order is subject to the risk management and supervisory controls, policies and procedures established by the Participant including the automated controls to examine each order before entry on a marketplace.
5. The Participant shall:
   1. at least annually review and confirm that:
      1. the standards established by the Participant under subsection (1) are adequate, and
      2. the Participant has maintained and consistently applied the standards in the period since the establishment of the standards or the date of the last annual review; and
   2. at least annually by the anniversary date of the written agreement assess, confirm and document that the client, investment dealer or foreign dealer equivalent:
      1. is in compliance with the written agreement with the Participant, and
      2. has met the standards established by the Participant under subsection (1) since the date of the written agreement or the date of the last annual review.
6. A Participant shall forthwith notify the Market Regulator:
   1. upon entering into a written agreement respecting direct electronic access, of the name of the client that is not eligible to obtain a Legal Entity Identifier under the standards set by the Global Legal Entity Identifier System; and
   2. of any change in the information described in clause (a).

A Participant or Access Person shall not enter an order on a particular marketplace if the Participant or Access Person knows or ought reasonably to know that the handling of the order by the marketplace and the trading systems of the marketplace may result in the display of the order or the execution of the order not being in compliance with any of the applicable requirements of UMIR.