By Wendy Rudd, IIROC Senior Vice President, Market Regulation and Policy
A number of IIROC dealer members have requested additional guidance on best execution compliance, given that changes in technology and market structure have increased order handling complexity in recent years.
By conducting an anonymous survey of all dealer members who execute secondary market trades for clients, IIROC was able to gather information quickly about current practices and learn how dealers are achieving best execution for their clients in a multi-marketplace environment.
IIROC focused the survey on considerations that affect best execution, including the use of smart order routers, order handling practices, governance and decision-making around best execution, access to lit and dark marketplaces, and how dealers treat marketplace fees and rebates. (Maker/taker marketplace fee models are prevalent in Canada.)
The survey is particularly important because the findings will help guide development of further IIROC rules, guidance and policies on best execution.
Certain survey results may lead us to focus on how dealers disclose information to their clients, especially information that could help investors better understand how their orders are handled by their dealer.
Also notable is that, despite the rules that are in place in Canada that would enable investors to receive price improvement when trading with dark liquidity, we found reluctance on the part of some dealers to consider opportunities to trade in dark pools.
Future policy work by IIROC may also include a focus on the level of supervision being undertaken by dealers to ensure best execution is being achieved.
Criteria Influencing Institutional Routing Strategy
Participants that are engaged in institutional trading and use a SOR (total of 55) were asked to rate on a scale of 1 to 10 the importance of selected criteria in influencing routing strategy for institutional orders entered during regular trading hours (9:30 a.m. to 4:00 p.m.).
The top tier of important factors included:
• current likelihood of execution (8.8/10 and 49% rating it a ‘10’); and
• price improvement opportunity (8.2 and 38%).
The second tier of important factors included:
• client preference (7.7 and 43% rating it a ‘10’);
• historically demonstrated liquidity in a security (7.5 and 25%);
• latency of execution (7.2 and 24%); and
• latency of data (7.0 and 22%).
The third tier of important factors included:
• potential crossing/internalization opportunities (5.5 and 12% rating it a ‘10’); and
• cost/opportunity to capture rebates (5.1 and 6%).
The least important factor was “a firm’s ownership or potential ownership of a marketplace (1.9 and 3%). “Order-to-trade ratio” was another reported minor factor influencing institutional routing strategy.