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 February 2013.
“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, however, including:
- 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- over half of the surveyed dealers do not subscribe to dark marketplaces (which are marketplaces that do not publish order information);
- 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 clients;
- 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); and
- 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 obligations.
Dealers should expect to see a greater focus on best execution by IIROC in the foreseeable future.