An Aequitas NEO Exchange Position Paper
Unintended Consequences, Conflicts of Interest, and the Chaos That Will Stem From a Partial Order Protection Rule
(Excerpt)
ORDER PROTECTION RULE (OPR)
OPR was introduced in February, 2011 as a result of changes made by the Canadian Securities Administrators (“CSA”) to National Instruments 21-101 Marketplace Operation and 23-101 Trading Rules. One of the key reasons was to protect retail investors from the complexities of fragmented markets. The intention was to ensure that retail investors were not disadvantaged by the fact that they are not as technologically sophisticated as other market participants and to provide comfort that regardless of where their orders were placed, those orders could not be ignored:
In a multiple marketplace environment, the assurance that better-priced orders will be filled ahead of inferior-priced orders is essential to maintain investor confidence and fairness in the market. Order protection is especially important to ensure the future participation of retail investors that have an historical expectation of such protection. Without such protection, there may not be sufficient incentive to contribute to the price discovery process because investors who disclose their intentions are not assured of the benefit of having their better-priced orders filled while others are able to use this information in their trading decisions. In addition, investors, including retail investors, may lose confidence that their orders are being treated fairly. This in turn, may contribute to the perception that an unlevel playing field exists providing certain participants with advantages over others. Such a perception may ultimately result in the removal of investors from the market.
– CSA NOTICE OF AMEMDMENTS TO NI 21-101 and NI 23-101 (2009)
In those four years, the Canadian equity market has evolved and currently looks drastically different. Given this evolution, is OPR still doing what it was intended to do? Although the original purpose behind OPR was well-intended and arguably right at that time, we are now operating in an environment with over ten protected markets dominated by High Frequency Trading (“HFT”) firms and other professional intermediaries.
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