Trading Manual Notes

Chapter 1 Overview of the Canadian Equity Trading Environment

1.3 Regulation and Structure of Canadian Places
Canadian Securities Administrators – CSA created 2 National Instruments
NI-21-101 Marketplace Operations
23-101 Trading Rules
Investment Industry Regulatory Organization of Canada now changed to Canadian Investment Regulation Organization
IIROC to CIRO
CIRO enforces Universal Market Integrity Rules – UMIR = Standard set of trading rules
CIRO is authorized to monitor real-time trading operations and market related activities, investigate violations, admin
settlements/hearings on violations
UMIR ensure integrity and fair and orderly market including the alternative trading systems – ATS
Rules have the below characteristics:
- Apply to trading on any marketplace that retains CIRO as regulation services provider
- Apply equally to all dealers who access UMIR-regulated marketplace (direct or interconnect agreement with
participant)
- Not circumvented by direct trading activity to another market outside of Canada
- Trading in all forms of exchange-listed securities
- Incorporate any exceptions to the rules required to accommodate working of a marketplace
UMIR applies to two categories of companies or persons:
1. Participants:
dealer participants of exchange, user of recognized quotation and trade reporting system – QTRS or subscriber to an
ATS
dealer-sponsored access
person acting as market maker or specialist
2. Access persons:
Subscriber or user of marketplace
Person to whom participant granted dealer-sponsored access but not a participant
Exchanges regulate certain activities specific to them that may not be covered under UMIR or CIRO-enforced

The Exchanges
Success depends on perception of fair and equitable, participants treated equal, info public and visible.
Standards:
- Spread btw bid and ask on individual stock is relatively small
- Trades frequent
- Price changes btw trades not dramatic
Exchange criteria:
- Listing function
- Prices are set competitively thru bidding process
- Transactions publicly visible
- Rules and regulations governing conduct of participants
- Market participants can be disciplined and fines levied against violations
Exchanges are also auction market.
- Physical : centrally traded trading floors = open outcry system
- Digital: networks of terminals connected to one computer system
- Hybrid like NYSE
TSX: formed in 1852 by group of businessmen meeting daily to trade stocks, officially incorporated 1878
- Apr 2000 – demutualized and became private, for-profit company
- Dealers = participating organization
- Nov 2003 – TSX Group went public
- Electronic trading system to trade senior Canadian Equities
MX (also called Bourse de Montreal): Sept 2000 demutualizes and publicly traded, acquired by TSX Group in 2007 and
became TMX Group
 - Trades deals exclusively in non-agricultural derivatives, transferring small cap equity stocks to TSXV in Sep 2001
TSXV: formed in 1999 merging Alberta and Vancouver Stock exchanges and acquired by TSX, Winnipeg stock exchange and
junior stocks from MX and the Canadian Dealing Network
- Specializes in junior stocks
- Operates NEX - when stocks fall below TSXV standards
CSE - Canadian Securities Exchanges: Nov 2008 CNQ (Canadian Trading and Quotation System Inc) relaunched to CNSX
(Canadian National Stock Exchange)
- Operated by CNSX Markets Inc, Pure Trading (alt marketplace for electronic continuous auction market)
- Jan 2014: Operates as Canadian Securities Exchange
- 2018: 460 issuers listed
Aequitas NEO
- Exchange provides listing services and facilitates trading securities listed on NEO, the CSE, TSX and TSXV
- Operates 3 separate, fully transparent trading books – NEO-N, NEO-L, NEO-D, and a crossing facility (what is a
crossing facility?)
Alpha: began as ATS in Nov 2008, Apr 2012 became exchange, Aug 2012 acquired by TMX Group
- Trades securities listed on TSX and TSXV
- Operates a trading venue
Nasdaq Canada: acquired Chi-x Canada an ATS 2016, 2018 exchange,
- Trades 3 trading books for TSX, TSXV, CSE
- Nasdaq CXC a lit book? Provides anonymous trading and strict price/time priority w/ option of post-trade
attribution
- CXC2 lit book unique pricing model and broker preferencing functionality
- CXD alt source of non-displayed (dark) liquidity with size discovery and price improvement opportunities
TSX Private markets: serve thru start-up, to private issuer to public issuer, support capital raising and secondary trading on
exempt market
ATS differs from exchanges as cannot provide listing services to issuers
- Allowed matching and execution services, and compliance responsibility as they may have better info on some
positions
- Operated by member or participating org of exchange regulated by regulations service provider (only IIROC)
- Cannot engage in exchange activities of 1) listing agreements, 2) 1+ marketplace participants guarantee 2-sided mkt
for a security on a continuous basis, 3) setting requirements for governing conduct of subscribers
- Obligated to implement safeguards and procedures to protect subscribers’ trading info, and ensure employees can’t
use info for trading their own accounts
QTRS: most jurisdictions recognize QTRS
- Person or company, other than exchange or registered dealer operating facilities authorized to disseminate price
quotations and report completed xactions to securities commission
- NI 21-101 – QTRS considered quoted if:
o Security subject to listing or quoting process
o Issuer or registered dealer trading it entered in agreement with QTRS to list or quote it
Negotiated Market (OTC): does not follow auction rules, prices posted are of a trader not investor. Client order w/ better
price but may not be posted
- Trades not subject to interference by better-priced orders, no central trading, may be reported as record not
obligated
- CDN (formerly owned by TSX) only organized OTC until Oct 2000 transferring to TSXV or those that didn’t apply
were transferred to CUB (Canadian Unlisted Board – web-based trade reporting system)
- OSC has jurisdiction in all CUB issuers and trading must be reported for market surveillance purposes, info not
available to public
- CUB not a marketplace – not a traditional exchange, QTRS or ATS, responsibility all lies with OSC with CIRO
monitoring on behalf of
- CNSX?

Equity Trader Roles

Proficiency Obligations under UMIR – a person responsible for entering order on a marketplace for or on behalf of must:
 - Complete CSI Training Course or any such course may considered demonstrative of proficiency of
Approved Trader: TSX and TSXV term for individual with approval to enter orders in their trading systems
2 types of trades
- Agency: dealer acting on behalf of client purchases/sell security, dealer receives service commission/fee, dealer has
no ownership – exchange-listed stock
- Principal: dealer buys/sells for its own account/inventory, in OTC client buy order filled from own inventory, dealer
earns spread, some exchange traded stock can also involve principal transaction to expedite trade w/ commission
o Restricted by requirement to give priority to client orders in certain circumstances
Market Makers: exchange use market making system to maintain fair and orderly market on listed issues
- TSX, TSXV, NEO, CSE employes market makers; TSXV and CSE support fee for service MM – Issuer Designated MM
- TSXV requires Issuer to issue press release when IDMM is assigned, CSE not, issuer choose and retain MM w/ mthly
fee
- MM assigned stocks of responsibility (SORs) based on criteria – size, quality of market being offered, performance
of existing SORs. Dealer assigns individual responsible designated trader to carry out MM duties
- RDT general more Sr and experience, ensure spread goals, own accounts reasonable and consistent, assist other in
execution of orders with SORs
o Use dealer’s capital and carry inventories of SORs to ensure liquid two-way market
o Receive adv in exchange for responsibilities assumed and restrictions imposed
o Smaller margin and preferential trading fee treatment
o Must be familiar with trading patterns of their assigned SORs, reviewing daily trading pattern of stock,
volumes and price changes, mvmts minimized to ensure no erratic behaviour not an exact science.
o TSX RDTs: 2 tiers for securities determined Qtly by ADVT of preceding 12 mths
 Tier A most active, Tier B less (with sub-tiers) – some Tier B have no MM due to insufficient liq
 Increase liq of SORs and encourage trading by other participants, 70-80% of personal trades are
non-disruptive or stabilizing
 Highest Ethical standards: Moderate price vol, liq and depth, continuous two-sided competitive
mkt; fill min guaranteed fills and tradeable odd lots
TSX Rule 4-601 in addition to UMIR proficiency requirement – participating orgs must meet the following:
- Demo mkt making experience acceptable to the exchange
- Provide sufficient trading desk and operations support staff
- Install sufficient tech tools acceptable to exchange permit org to carry out MM responsibilities
- Appoint RDT for each SOR
MM = sr trading position with excellent knowledge of equities coverage and strong numerical + analytical skills
MM compensated on % of trading profits agreed by employer along with fixed compensation on other f(x)s

Individual Investor trades: use active trader platform, discount trading platforms offer mkt info & order entry, may also
choose traditional stock brokers to handle orders.
- Usually auto but have teams for special, exceptions or large trades – salary plus performance bonuses
Agency Traders: work for dealers, accept and execute large block trades from institutional clients, solicit orders from buy
side as sales traders (relationship based) – have access to different institutions + in-house inventory orders + execution
capability in addition to selling research and sales ideas. Comp largely performance based
Electronic Liquidity Providers: High Frequency traders, trading opps based on arbitrage, pay for additional liquidity = large
volume small fractions
Principal (Prop) Trading (broker dealers): trades for profit using firm’s capital, use risk arbitrage (converts, event driven) –
comp driven by profitability and % of or pooling
Buy-side Traders: mandates based on investment strat, investment decision by PM and execute different order options
- Perform transaction cost analysis (TCA)
- Have direct execution access (DEA)
- i.e. access person = person or entity other than a participant that is either subscriber of ATS or user of QTRS or
person whom dealer-sponsored access has been granted
- limited application of UMIR provisions to access person:
o transact openly and fairly but not just and equitable trades
o not required to designate types of orders (i.e. principal, non-client or jitney orders)
o ATS no need to train access person but responsible for all trades are in compliance
 o Obligated to provide info to regulators, not required maintain or transmit e-record of each order
- Comp salary + performance based incentive based on firm + individual performance and TCA

Trader’s Duty
- Duty is to the client, since they pay service fee based on fiduciary trust
- Beyond doing what is permitted while avoid what is prohibited (judgement calls are moral)
- Learn mistakes and errors
- No intentional negligence and disregard
- Skilled at finding best market and perform best ex on trade
Client Priority – UMIR Rule 5.3, latest amended Mar 9, 2007 to include:
- Participant cannot enter a principal or non-client order if they know (or ought to reasonably know) that the order
will like execute in priority to client order if:
o Same security
o At same or inferior price
o On same side of market
- Part 2: with exceptions, traders can never intentionally trade ahead of client order or tradeable limit order received
prior to entry of principal/non-client order:
o Withholding/removing order to permit principal/non-client order
o Entering order in illiquid market and enter the other in liquid
o Adding terms to client order unbeknownst to client
o Enter principal/non-client order as anonymous
o Exceptions: client specifically consented, principal/non-client order executed pursuant to an allocation of
trading system of marketplace
 Security only on that market place
 Non-client order is call market/opening/market-on-close or VWAP order
 Orders entered at the same market place
 Client instructed participant to enter client order on particular marketplace or does not disclose
identifier of participant in consolidated market display
Best Ex of Client orders Dealer Member Rule 3300
3300.2 Broad Factors: price, speed, certainty and overall cost of transaction when cost passed on to clients
On Listed and FX traded securities: appropriate routing strategies, fair pricing of opening order, marketplace timing on open
and available for trading, order & trade info from all marketplaces, executing on unprotected marketplaces, sending orders
to foreign intermediary for execution
Manually handling client order following “prevailing market conditions” in Canada: direction of market, depth, last sales
price/volume, size of spread, liquidity
3300.8 Review of BestEx Policies and Procedures
- At least annual review, and whenever there is material change to trading environment
Process to review including governance structure specifying:
- Who conducts review, what info source, review procedures, description of trigger events, how Dealer Member
evaluates effectiveness of procedures, who receives reports of results
- CIRO review tests conducted by dealer member
- Must ensure clients understand and know dealer member’s policies and procedures on BestEx
High Frequency Trading (HFT): not a trading strategy, profit by ST pricing inefficiency/mkt liquidity imbalances
- Highly automated
- High trading volume
- Short holding periods
- Low number of overnight positions: low risk, low gain investment strategies for LT investing – high risk, high gain
- Low capital investments: sometimes close out before close of market
Total Trading (all trading)  Algo (directional usually used for large block trading to reduce market impact)  HFT
(market neutral)

Chapter 2 Orders and the Book

Types of orders and terms
TSX & TSV provide a separate special terms order book – have no standing in regular board lot market
Regular orders terms:
Committed order
Stabilizing trade: buy below and sell above last price trade
Destabilizing trade: buy above and sell below
Neutral Trade: trader unwind prev taken position
Imbalance: # shrs bought > # shares sold, net position may adversely affect price
- RDT responsible to enter orders pre market open to even out imbalance
- TSX RT – registered trader function
Program Trade: made in conjunction w/ deriv trade
Attributed and unattributed (anonymous) orders:
- Attributed: displayed in book w. participating org’s (PO) trading # vs
- Unattributed: displayed w/ no #
- Each PO have unique numeric ID on all trades and order reports, can choose not to disclose ID on certain orders
tagged with 001
- MGF, lot and AON orders can be unattributed as long as they are of board lot volume
- Orders w/ settlement terms cannot be unattributed

Broker preferencing: orders matched with brokers if not jitney and anonymous orders
Bypass order: trade only passive visible volume, no undisclosed volume orders
Dark order types: demand for anonymity grown
- DRK Limit orders
- DRK Midpoint peg orders
- Seek Dark Liquidity (SDL) orders
Short Marking Exempt maker
Disclosed order
Undisclosed order
Day Order
Open Order
Good till Cancelled Order (GTC)
Market Order
Limit Order
Any-Part order
Short Sale Order
Long Life order
Non-Cient order
Put-through order, or a cross
Cancel/change former order
Cancel notice
At the open order
Must be filled order

Special term trades divided into 2 classes:

1. Orders subject to unusual conditions of execution – not eligible for entry into Board Lot Book (the Book)
2. Orders subject to unusual settlement instructions - not eligible for regular settlement via the clearing agency
Price discretion order
All-or-None Order (AON)
Fill-or-Kill order (FOK)
Immediate or cancel order
Either/or order
Contingent order
Ratio Contingent order
Switch order
On-stop order
Iceberg Order
Non-displayed (or Dark) orders
Scale Order
Minimum Guarantee fill order
Cash settlement
Delayed delivery

Special Types of orders under UMIR

Basis Order
Call market order
Market-on-close order
Opening order
Special Terms Order
VWAP order
Closing Price order

TSX Specialty Prices crosses

Basis Cross
VWAP Cross
Contingent Cross
Special Trading Session Cross

Algo Trading
Smart Order Routers: Requirement of all brokers to achieve best price available in a multiple marketplaces environment
1. Stage 1: Validation – e.g. fat finger check, risk and compliance checks
2. Stage 2: sweeps marketplace for dark liquidity
3. Stage 3: sweep multiple markets or sequential target markets (for better cost, but predictable) in displayed markets
4. Stage 4: selection of market place where order posted if unfilled volume remain
Convergence of SOR and TCA – strategies based on execution cost and fill ratio (filled/displayed before order sent)

The Book: central file of outstanding orders known as Board Lot Order Book, all outstanding orders awaiting execution in
market place
Booked order must be filled once market cross limit price
Special terms order limit execution, no guarantee of fill even if price moves beyond order’s price
special terms and odd lots often sold off the market entered into other books, handled manually by trader on best effort
basis
if MM system, odd lots may be guaranteed execution at current market price with exceptions
displayed booked orders cannot be traded through but special terms order can be
Market orders, tradable limit orders and limit orders, day and GTS orders are eligible for entry into Book
Short sale eligible depending on system – must comply with UMIR provisions

Disclosed orders, partially or undisclosed

Disclosed: order publicly displayed in the Book or other books, order is assumed fully disclosed unless trader is instructed
otherwise
Partially disclosed = iceberg: hybrid, client may not want to disrupt market before complete fill is received.
Undisclosed: trader watch market and step in, risky as they may not receive a fill they don’t have priority

Unattributed order: displayed in Book w/o the securities dealer trading number vs undisclosed volume order: size or portion
of order not displayed in the Book
Anonymous orders unattributed order
TSX order priority rules state order loses time priority if disclosed volume is increased it must rank behind all other disclosed
orders

AON, Contingent, FOK, minimum fill– not booked in all systems

Cash Settlement, Delayed delivery booked on TSX and TSXV terms market
Non-resident booked on TSX terms market, N/A on TSXV
Equity Option Conversion, Dividend Rentals not booked on TSX, N/A on TSXV
Market-on-close see chapter 5
Cash traders for Expiring rights and warrants may be entered in Book rules set by exchanges

Order Markers: symbols or codes indicated on trade ticket to flag certain info
MGF – NO vs – Yes
CASH, NON NET
DELAYED DELIVERY
IA, IN, JN, N/N-C, SS
OT
PPT, PT, ST
Short Sale, Short-Marking Exempt
XI

Standard trading unites and min trading increments defined by each exchange and QTRS
UMIR board lot:
- A derivative instrument / 1 contract
- Listed or quoted debt security = $1,000 in principal amt
- Equity:
o 1k for <$0.1 per unit
o 500 for $0.1<unit < $1.0
o 100 for >=$1.0
Mixed lots and odd lots
Minimum trading increment -<$0.5, tick size 0.5 cents, >=$0.5 tick size 1 cent
Spreads: min price variation btw best bid and ask

Chapter 3 Trading Rules: The opening

Trading hours on TSX, TSV, CSE, NEO lit and Nasdaq Canada has opening auction, order entry accepted at 7am, market open
from 9:30am – 4pm. Trades do not occur pre-open, regular (or post-open) trading

Pre-opening tasks for Traders and RDT

Trade Reconciliation
Open Orders
Adjusting Ex-Dividend Orders
Review previous day trading and plan current day, observe pre-opening/indicated markets
Entering New Orders
Pre-opening Indicated markets

Exceptions
Delayed Opening on the TSX
At the opening
Allocation of trades