The Investment Industry Regulatory Organization of Canada will hold a roundtable on June 23 to discuss the impact of Canada’s dark trading provisions on the routing of retail order flow to the U.S.

Canadian securities regulators have expressed concerns about Canadian retail order flow being shipped south of the border, where it is executed primarily on dealer internalization systems that don’t guarantee price improvements, which are mandatory in Canada under trade-at provisions that were instituted in 2012.

The roundtable will discuss alternatives to proposals in IIROC’s Jan. 29 republication for comment of its anti-avoidance provision that would permit market participants to execute small client orders on a non-Canadian market only when the order is entered on a foreign organized regulated market (FORM) that displays order information, or the order receives meaningful price improvement.

In a March 30 comment letter, the Canadian Security Traders Association said that the anti-avoidance provision would adversely impact Canadian dealers as well as the demand for Canadian stocks, many of which are interlisted on Canadian and U.S. markets.

Forcing execution to occur only in lit markets would dramatically raise the cost of execution for dealers with southbound flow, as lit markets are generally more expensive than dark, the CSTA said.

“This would reduce the competitiveness of Canadian dealers competing globally for internationally-originating flow in Canadian stocks, as dealers registered in other jurisdictions would face greater execution options and a lower cost structure than Canadian dealers,” said the letter.

A study by IIROC on the impact of the dark rule amendments analyzed the use of dark trading venues by brokers to trade with their active retail flow. Certain elements of Canadian market structure in the period prior to the dark rule implementation facilitated the ability of a broker to take the other side of its clients’ trades. The analysis shows that a few brokers implemented market-making strategies on IntraSpread to trade with the segregated retail flow on that marketplace. After the implementation of the Dark Rule Amendments, this activity significantly declined.

“Our analysis highlights the impact of the dark rules on individual broker business models,” said IIROC in a statement. “Those dependent on segregated retail flows were impacted more than those with more diversified liquidity provisioning activities.”

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