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NOTICE 2014-006 - Notice Of OSC Approval: Amendments To Rule 4 and Changes To Oddlot Matching

October 23, 2014

Introduction

In accordance with the Process for the Review and Approval of Rules and the Information Contained in Form 21-101F1 and the Exhibits thereto (Exchange Protocol) for recognized exchanges, the Ontario Securities Commission (OSC) has approved amendments to the Rules of CNSX Markets Inc. (CNSX Rules). 
The purpose of the Amendments to Rule 4 was to provide more clarity about the role of Market Makers and introduce a Guaranteed Fill functionality for client orders and automatic execution for odd lot orders.  The Amendments also included housekeeping amendments to reflect the change in the operating name of the Exchange.  
Following the publication of the proposed amendments to Rule 4, the Exchange proposed changes to the matching algorithm for orders less than a Standard Trading Unit (i.e., odd lots) that would result in odd lots trading any-part rather than all-or-none.  The proposed change would be introduced along with the previously announced amendments to Rule 4.  

Reasons for the Amendments

A. Rule 4 Amendments

Background
These changes are being made to satisfy demands by dealers and their retail clients. The addition of these functions will assist dealers with compliance and allow them to improve fill quality while playing an active role in Market Making activities

Rationale
The rationale for the amendments to Rule 4 is described in Notice 2014-002 Notice and Request for Comments - Amendments to Rule 4 Trading of Securities, published April 11, 2014.  
Guaranteed Fill – GMF was designed to improve fill quality for client orders through the use of traditional market makers. This auto execution function will benefit retail-sized orders and dealers will see increased trade sizes helping reduce clearing charges.
Odd Lot Auto Trading- By implementing this significant change our dealers will benefit from better-priced and timelier odd lot trading, easing the burden associated with this type of trading and providing better fills for retail clients attempting to trade odd and mixed lots.

Summary of the Amendments
The world “listed” will be deleted from the definitions of “Market Maker” and “Market Maker Security” so that the definitions and rules apply to all securities traded on the Exchange.  The definition of “Market Maker Security” will be further amended to reflect the change to a single designated Market Maker per security.
New Rule 4-107 Guaranteed Fill Facility will describe the eligibility requirements for the new Guaranteed Fill (GF) functionality that will provide automatic fills by the designated Market Maker for client orders that include an eligibility tag.  These fills will be executed at the bid or offer up to set GF amount for that security in the order books.  This functionality will be available for odd lot, mixed lot and board lot orders.
4-112 Appointment of Market Makers will be amended to describe the general performance criteria that will be considered by the Exchange, and include provisions for withdrawing approval or waiving notice periods.
When considering a Market Maker appointment the Exchange will consider the service level commitment proposed by the Market Maker, that being the Guaranteed Fill volume and the proposed bid/ask spread goal, and any available performance history from that Market Maker.
4-113 Quotations will be renamed “Commitments and Performance” to reinforce the commitment to
Maintaining a bid/ask spread goal;
Providing a Guaranteed Fill;
Providing automatic odd lot execution, so that all incoming market or better limit odd lot orders will be auto traded at the bid/ask if they cannot be filled by booked odd lot orders;
Ensuring a reasonable bid/ask in the context of current conditions;
Undergoing periodic performance reviews


B. Oddlot Matching Changes

Background
Odd Lot orders are orders for a volume less than a Standard Trading Unit (UMIR) or “boardlot” (CSE) and are considered Special Terms Orders.  In the CSE trading engine odd lots are currently matched on an all-or-none basis, and may trade outside the context of the current bid/ask.

Rationale
The rationale for the changes to oddlot matching can be found in NOTICE 2014-005 – Notice & Request for Comments – Changes to Odd Lot Matching, published September 4, 2014.
On July 25, 2014, the OSC approved the proposed amendments to Rule 4 to facilitate the introduction of the Guaranteed Fill facility and odd lot automatic execution against a Market Maker.  By implementing this significant change our dealers will benefit from better-priced and timelier odd lot trading, easing the burden associated with this type of trading and providing better fills for retail clients attempting to trade odd and mixed lots.    For securities without a Market Maker, however, the existing all-or-none matching would result in a disparity in the treatment of odd lot orders.  The adoption of any-part trading for odd lots will reduce the disparity and improve the quality of fills on all securities, with or without Market Makers.

Summary of the Changes
Incoming odd lots will match with any odd lot orders in the book.  For securities with a Market Maker, the incoming order will trade with any booked odd lot orders at a price better or equal to the existing bid/ask.  Any balance will then be filled automatically by the Market Maker.  For securities without a Market Maker, incoming odd lot orders will match with any orders in the book, based on the price/time priority.

Summary
The Exchange received one (1) comment letter in response to the Request for Comments on the proposed changes to oddlot order matching.  The comment letter broadly addressed the previous proposals for amendments to Rule 4, and was generally supportive of all changes. A summary of the comment submitted, together with the CSE response, is attached as Appendix A. 
We thank the commenter for its feedback. No changes to the proposals were required as a result of the comments.
The Text of the Amendments is attached as Appendix B. 

Effective Date 
The Amendments will become effective on October 27, 2014 (the “Effective Date”).

Questions
Questions or comments about this notice, the rule amendments or changes to oddlot matching may be directed to:
Mark Faulkner
Vice President, Listings & Regulation
416.367.7341 or Mark.Faulkner@thecse.com


Appendix A – Comments Received
List of Commenters:
Montana Gold Mining Company Inc.


 Summary of Comments Received

 CSE Response

Commenter emphasizes the importance of immediate execution and fairness of price, citing experience with deep discounts and premiums for oddlot fills.
 The amendments to Rule 4 and the changes to oddlot matching were proposed to address these issues.


Commenter offers suggestion of distinguishing between oddlot dealers and Market Makers, perhaps with Market Makers becoming the responsibility of the issuer.  Generally, the commenter is supportive of the changes to improve fill quality, fairness, and the perception of equal treatment for investors.

By definition, Market Makers must be CNSX Dealers.  Designated Market Makers will be required to take on the responsibility for filling oddlots.  An issuer that wishes to engage the services of a third party that may or may not be a CNSX Dealer may do so in accordance with the Policies of the Exchange and the Universal Market Integrity Rules.





Appendix B

Amended Text

“Market Maker” means a CNSX Dealer approved as such for a particular security.

“Market Maker security” means a security for which CNSX Dealer has been appointed as Market Maker.

4-107  Guaranteed Fill Facility

(1) Eligibility

An order that is a client order for a security that is, in its entirety, for a volume less than or equal to the Guaranteed Fill volume on that security is eligible for a guaranteed fill, provided that the order is not:

a)    One of multiple orders for the same client on the same day;

b)     An order entered by a DEA client, unless the DEA client is a broker acting as an agent for retail client order flow;

c)    An order entered on behalf of a U.S. dealer, unless

       i)  the order is for a client of the U.S. dealer; and
      ii)  The Dealer first confirms the order is for a client of the U.S. dealer; or

d)   For a client that is generally involved in active and continuous trading on a daily basis

(2)  Fills that occur in violation of the eligibility requirements above may be cancelled at the request of the Market Maker.  The Exchange may cancel or amend any trades deemed to be improper use of the Guaranteed Fill facility.

4-112  Appointment of Market Makers

(1)       A Dealer wishing to act as a Market Maker in a Listed Security shall file notice thereof with the Exchange on the prescribed form and shall become obligated to perform the functions of a Market Maker upon approval by the Exchange.  Before granting such approval, the Exchange will consider

(a)  The Guaranteed Fill volume proposed by the Market Maker;

(b)  The proposed goal for the average bid/ask spread;

(c)  Performance history as a Market Maker. 

(2)       Subject to Rule 4-101, a Dealer approved as a Market Maker shall appoint a Primary Trader to perform the obligations set out in these Rules and an Alternate Trader to act in the absence of the Primary Trader. 

(3)       A Dealer approved as a Market Maker must maintain a two-sided continuous quotation for a period of not less than three consecutive calendar months and must give the Exchange at least 30 days advance notice of its intention to relinquish any Market Maker Obligations. 

(4)       A Dealer which ceases to act as a Market Maker in respect of a Listed Security may not become a Market Maker in that security for a period of 30 days. 

(5)       The Exchange may in its sole discretion designate a Dealer as a Market Maker in respect of a Listed Security where the Dealer’s trading activities suggest the market will be better served by the Dealer assuming the responsibilities of a Market Maker. 

(6)       The Exchange may in its sole discretion withdraw the approval as a designated Market Maker on one or more securities with or without notice. 

(7)       The Exchange may in its sole discretion waive the three month requirement or the notice period of 4-112(3) or the waiting period described in 4-112(4).             

4-113  Commitments and Performance

 (1)          Two-Sided Quotations. A Designated Market Maker shall 

(b)  buy and sell such security for its own account on a continuous basis, and

(c)  ensure two sided quotations in the Trading System Within the accepted bid/ask spread goal. 

(2)          Minimum Size of Guaranteed Fill. A Designated Market Maker’s Guaranteed Fill volume shall be for at least two Board Lots less one share on each side of the market and may be for larger Board Lot multiples thereof. 

(3)       Odd Lots. A better priced limit order or market order that is for a volume less than a Board Lot, or the portion of a tradable order that is less than a Board Lot, shall be filled automatically by the Market Maker provided that the Board Lot portion of such an order is filled first. 

(4)       Quotations Reasonably Related to the Market. A Market Maker shall enter and maintain quotations that are reasonably related to the prevailing market.

(5)       The Exchange will periodically review the performance of each Market Maker with respect to bid/ask spread maintenance and other relevant measures, as determined by the Exchange from time-to-time.

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