The CSA is studying the impact of transaction fees and rebates on order routing behaviour, execution quality and market quality by applying temporary restrictions on marketplace transaction fees applicable to trading in liquid equity securities. Where possible, the study will occur in conjunction with the SEC’s study for interlisted securities, and 3-6 months prior to the SEC study for non-interlisted securities. For example, they will study the impact of the prohibition on the “maker-taker” model where the participant that provides liquidity is paid a rebate and the other is charged a fee, as well as on the “inverted maker-taker” model. Potential issues that have been identified include conflicts of interest for dealers, segmentation of order flow (retail vs. institutional) and increased intermediation of trades where the liquidity is such that intermediation may not be needed.
Overview of the Council’s Comments:
We expressed support of the collaborative, data driven approach proposed by the CSA. In general, we suggested observing how the overall degree of intermediation, particularly across liquid securities, impacts investors. We stressed the importance of understanding the impact of rebates on execution quality measures, such as implementation shortfall, time-to-fill and other delay opportunity cost of unfilled trades and market impact metrics, should also be considered with equal emphasis. More specifically, from an institutional investors’ perspective, often the costliest order is the order that is delayed, or never completed at all. We encouraged regulators to examine passive order placement and to measure the delay cost of marketable, passive orders that are canceled or subsequently repriced. The council welcomed the examination of longer horizons for inclusion in the event that such inclusion yields meaningful insight or observations of specific behaviours, especially with respect to those securities that trade less frequently, such as those deemed medium-liquid in the study design. Lastly, while expressing general support, we queried if a broader best execution review may be appropriate following this study and with its results available for examination of broker behaviours.