On March 28, 2014, IIROC released a notice (14-0082) summarizing
the results of an online survey on the issue of best execution of
its members engaged in secondary market trading of listed
securities. The survey was conducted between December 2012 and
"Best execution" is defined under National Instrument 23-101 as the "most
advantageous execution terms reasonably available under the
circumstances", and the NI 23-101 obligation is to use
"reasonable efforts" to achieve best execution. For IIROC
regulated dealers, the obligation as set out in Rule 5.1 of the Universal Market Integrity
Rules (UMIR) is to "diligently pursue the execution of
each client order on the most advantageous execution terms
reasonably available under the circumstances."
Additional guidance is included in the UMIR policies and in
Companion Policy 23-101, and UMIR Rule 7.1 requires the adoption of written
policies and procedures. In Canada, best execution is subordinated
to other rules, including the "best price" rule (UMIR
Rule 5.2) and the order protection rule (Part 6 of NI 23-101),
which are designed to generally seek to ensure the execution of
better-priced orders. It should be noted, however, that best
execution obligations apply to all registered dealers and advisers,
not just the surveyed dealers that are participants in marketplaces
(including alternative trading system subscribers). The obligations
also apply to all types of securities.
That said, the survey covered a number of different types of
dealers, including integrated firms, institutional dealers,
discount brokers and introducing dealers, and survey results varied
materially by dealer type. A number of interesting results emerged,
less than half of the surveyed dealers are members of or
subscribers to all marketplaces;
over half of the surveyed dealers do not subscribe to dark
marketplaces (which are marketplaces that do not publish order
less than half of the dealers surveyed use smart order routers
(SORs), and of those that use SORs most (57%) use SORs supplied by
third party vendors, while 16% use marketplace supplied SORs and
10% use proprietary SORs;
5% of the dealers surveyed reported having no processes to
comply with the order protection rule;
most dealers do not pass marketplace rebates on to their
clients, while some do, and this is generally not disclosed to
most dealers do not pass marketplace trading fees on to their
clients (and most but not all disclose that fact to clients), while
some dealers do pass marketplace trading fees on to their clients
(including some that don't pass on rebates to their clients);
a significant number of dealers, including a slight majority of
those that are not marketplace participants, do not supervise
compliance with best execution obligations.
IIROC indicated that:
some dealers may be missing price improvement opportunities for
clients by not routing orders to dark marketplaces;
IIROC is concerned that disclosure about marketplace fees and
rebates may be incomplete or inconsistent; and
IIROC may need to better articulate best execution supervisory
Dealers should expect to see a greater focus on best execution
by IIROC in the foreseeable future.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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