ded CANADIAN SECURITY TRADERS ASSOCIATION, INC. P.O. Box 3, 31 Adelaide Street East Toronto, Ontario M5C 2H8

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1 ded CANADIAN SECURITY TRADERS ASSOCIATION, INC. P.O. Box 3, 31 Adelaide Street East Toronto, Ontario M5C 2H8 May 29, 2014 Colin Yao Legal Counsel, Regulatory Affairs (Equity Trading) Toronto Stock Exchange The Exchange Tower 130 King Street West Toronto, Ontario M5X 1J2 Market Regulation Branch Ontario Securities Commission 20 Queen St West, 22 nd Floor Toronto, ON M5H 3S8 To whom it may concern: Re: OSC Request for Comment re: TSX Inc. (TSX) - Proposed Change to the TSX Market-on-Close Facility The Canadian Security Traders Association, Inc. (CSTA), is a professional trade organization that works to improve the ethics, business standards and working environment for members who are engaged in the buying, selling and trading of securities (mainly equities). The CSTA represents over 850 members nationwide, and is led by Governors from each of three distinct regions (Toronto, Montreal and Vancouver). The organization was founded in 2000 to serve as a national voice for our affiliate organizations. The CSTA is also affiliated with the Security Traders Association (STA) in the United States of America, which has approximately 4,200 members globally, making it the largest organization of its kind in the world. This letter was prepared by the CSTA Trading Issues Committee (the Committee ), a group of 22 appointed members from amongst the CSTA. This committee has an approximately equal proportional number of buy-side and sell-side representatives with various areas of market structure expertise, in addition to 2 independent members. It is important to note that there was no survey sent to our members to determine popular opinion; the Committee was assigned the responsibility of presenting the opinion of the CSTA as a whole. The opinions and statements provided below do not reflect the opinions of all CSTA members or the opinion of all members of the Trading Issues Committee. 1 CSTA

2 The CSTA appreciates the opportunity to comment on the proposed change to the TSX Market-on-Close facility (the "Proposal") and the possible implications to the closing process for TSX-listed, MOC-eligible securities. The CSTA believes that the TSX Market-on-Close ("MOC") facility serves a critical role in the smooth function of Canadian equity markets. With the TSX's role as the listing market for all senior Canadian equities, the MOC facility directly impacts the determination of the closing prices that are used for endof-day valuations by most participants, including index providers, fund custodians and pensions. It also serves in the management of end-of-day rebalance and cash-flow activities, which are frequently benchmarked to closing prices. We believe that protecting the integrity of the TSX closing mechanism is very important, and that the TSX MOC facility deserves more scrutiny than most other marketplace facilities in Canada due to its fundamental role. We thank the TSX for proposing long-requested changes to the function of the MOC facility. We believe that the ability to enter limit-on-close ("LOC") orders prior to the 3:40 PM imbalance dissemination adds an important capability to natural investors who may be seeking the close, but nonetheless are unwilling to trade at any clearing price (as determined by taking into account the TSX MOC closing price acceptance parameter). We also believe that the introduction of odd-lot trading to the TSX MOC fixes a functionality gap and addresses a commonly cited complaint among users. With the above said, we believe that there remains certain functionality issues that should be addressed with the proposed model. We will discuss these issues in turn. Market-on-Close Imbalance Calculation The Proposal contemplates calculating and disseminating the closing imbalance with reference to the midpoint of the TSX best bid and offer (the "TSX BBO"). We believe that the imbalance represents trading interest with respect to the current prevailing market price, which should reflect all price discovery in the market at the time of the snapshot. Therefore, we believe that a more appropriate reference measure would be the midpoint of the best bid or offer across all protected Canadian marketplaces. We do not believe that excluding other marketplaces' price discovery at 3:40 PM is appropriate on the grounds that the orders outside the TSX book are ineligible to trade in the closing auction. The 3:40 PM midpoint represents a reference price for the imbalance calculation and is an indicative price. It is not generally related to liquidity available at the book at the time of closing call (4:00 PM). Handling of Non-Marketable Limit-on-Close Orders The treatment of non-marketable limit-on-close orders (those which do not contribute to the published imbalance) was the subject of considerable debate amongst CSTA TIC participants. Some contributors believed that those LOC orders which do not contribute to the imbalance should be cancelled. Others believed that such cancellation should be optional. There was relatively little support for a mandatory "lock-in" model as proposed today. A significant issue exists with LOC orders that remain the in the book without contributing to the imbalance, These orders may become marketable between the 3:40 PM imbalance dissemination and the 4:00 PM closing call, resulting in an on-close imbalance that is not disseminated, thus offering no opportunity for participants to provide offsetting liquidity. Additionally, any participants entering LOC 2 CSTA

3 orders which are not part of the imbalance will be aware of the existence of such order in the book and of the resulting impact on the end-of-day clearing price; such participants would therefore be at an information advantage over the rest of the market. Furthermore, we note that these concerns may arise in situations where there is no published MOC imbalance at all, as the only LOC orders in the book were non-marketable at 3:40 PM. Moreover, those users entering LOC orders with non-marketable limits at 3:40 PM may wish to re-price their orders subsequent to the 3:40 PM imbalance dissemination. The lock-in model as proposed by the TSX does not permit this behavior. In order to address this need, the TSX may wish to allow users to cancel and re-enter their LOC orders past 3:40 PM if they are not part of the imbalance. Note that giving users the ability to cancel their own order does not address the "flipped on-close imbalance" issues, or the information asymmetry concerns noted above. Amongst the CSTA TIC participants, the preferred approach was the subject of considerable debate, with no clear consensus on the best solution. We note that the consensus among contributors is that no "perfect" solution will be found, and that all possible models may be subject to trade-offs with respect to information advantages for some participants. Eligibility for Price Movement Extension A significant current limitation of the MOC system is the tendency for low-priced stocks to enter price movement extension on relatively small imbalances. The current PME parameter of 3% represents a very small number of trading increments (at which liquidity may be found). In some situations, the 3% parameter is even insufficient to cover the bid-ask spread in the security at question. We recommend that an additional parameter to consider the number of trading increments be introduced to determine whether price movement extension is triggered. A PME would then only be triggered if the calculated displacement from last sale and the 20-minute VWAP at 4:00 PM would be in excess of both the 3% PME parameter and a minimum of a certain number of trading increments. Price Movement Extension Imbalance Recalculation We believe that the mechanism for closing a stock through price movement extension would benefit from a recalculated MOC imbalance. A stock may enter price movement extension because the published imbalance is only partly offset, or if the imbalance is "flipped" as a result of offsetting orders in excess of the imbalance that are aggressively priced. In each situation, we believe that the potential liquidity providers participating in the PME session would benefit from updated imbalance dissemination. Additionally, this would address the current issue with "flipped" imbalances which cannot be offset at all, as each offsetting order to the original imbalance is on the same side of the market as the "new" imbalance. Limit-on-Close Orders in Price Movement Extension We believe that the current practice of locking-in offsetting LOC orders entered during the PME should be reviewed and revised. We believe that it is appropriate to allow participants to cancel and re-enter (as needed) their offsetting orders in the TSX MOC book. This behavior would be consistent with the practice for offsetting LOC orders entered between 3:40 PM and 4:00 PM. 3 CSTA

4 Introduction of Closing Offset Orders We request that the TSX consider introducing "Closing Offset" orders as a supplemental order type for use in offsetting MOC imbalances. Such orders would be eligible to satisfy imbalance but not "flip" the imbalance through aggressive pricing. A Closing Offset order would thus be a purely liquidity-providing and price-stabilizing order type, consistent with the aims of offsetting limit-on-close orders entered after the 3:40 PM imbalance publication. We note further that with the introduction of Closing Offset orders, the TSX may wish to consider permitting only such orders as candidates for offsetting an imbalance that has resulted in a price movement extension. This approach would ensure that any imbalance in a price movement extension cannot be "flipped" and result in a further imbalance. Fully Hidden Dark Orders In the interest of providing as much liquidity as possible to the closing auction, we believe that it is appropriate to make fully hidden orders eligible to trade in the TSX MOC book. We note that such orders are always liquidity-providing if they rest in the book, and are functionally very similar to iceberg orders which display a de minimis quantity in an otherwise deep book. We also note that fully hidden orders are functionally equivalent to MOC offsetting orders priced at levels at or inferior to the current TSX BBO. We note that MOC offsetting orders and fully hidden limit orders are both non-displayed, each provides liquidity, and yet only one of those categories can serve to stabilize a MOC imbalance. Single Stock Circuit Breakers Given IIROC's recent publication for comment of a proposal to extend the Single Stock Circuit Breaker (SSCB) model to 4:00 PM, we believe that it is appropriate and necessary for the TSX to amend the MOC facility to handle a situation whereby an MOC-eligible stock is halted for a single stock circuit breaker near to the time of the close. We do recognize that the proposals from IIROC remain outstanding, and may not proceed as proposed. However, the decision of whether the SSCB model applies in the final period of trading each day should be made on its own merits, rather than based on the limitations of the TSX MOC book. As it is implemented now, and as proposed, the TSX MOC facility is incompatible with late-day SSCB halts or late-day stock freezes. We request that the TSX amend the proposal to include provisions wherein an orderly close is possible in those situations. One possibility we would request the TSX consider is automatically entering a stock into price movement extension in the event that a SSCB halt or stock freeze occurs in the final 20 minutes of trading; this would ensure that all offsetting eligible liquidity providers have an opportunity to react to any published imbalance. ETF Eligibility for the Market-on-Close Facility The final outstanding issue raised in CSTA TIC discussions has been the continued eligibility of exchange traded funds for the Market-on-Close facility. There remain some significant concerns around the appropriateness of MOC eligibility for securities whose value is determined through arbitrage of other markets. In situations where those markets are closed (such as the MOC closing call), and no hedge is 4 CSTA

5 available, the clearing price resulting from the MOC auction may not be sufficiently well determined. This may result in unintended and adverse impact on investors. We believe that the eligibility of ETFs and structured products for the MOC facility should be comprehensively reviewed and examined. Conclusion We thank the TSX for undertaking the much anticipated review of the TSX Market-on-Close facility. The review process has been a difficult one for all those involved due to the critical importance of the facility, the conflicting views amongst its users and the time required to be thorough in processing and amalgamating differing opinions. We strongly believe that the TSX must address each of the above mentioned issues before proceeding to making any changes. Given that changes to the MOC facility have historically been infrequent, and that changes to the mechanism are disruptive, we believe it in the interest of all participants to enact one comprehensive set of revisions rather than deferring some changes to a later date. We thank you for the opportunity to comment on this important matter. Respectfully, Signed by the CSTA Trading Issues Committee c.c. to: OSC: Mr. Howard Wetston, Chair and CEO Ms. Maureen Jensen, Executive Director & CAO Ms. Susan Greenglass, Director, Market Regulation Ms. Tracey Stern, Manager, Market Regulation AMF: M e Anne-Marie Beaudoin, Secrétaire générale BCSC: Ms. Sandra Jakab, Director, Capital Markets Regulation IIROC: Ms. Susan Wolburgh Jenah, President and CEO Ms. Wendy Rudd, SVP, Market Regulation & Policy Mr. James Twiss, Vice President, Market Regulation Policy Ms. Deanna Dobrowsky, Vice President, Market Regulation Policy Mr. Mike Prior, Vice President, Surveillance TMX: Mr. Tom Kloet, CEO Mr. Kevan Cowan, President Ms. Deana Djurdjevic, SVP, Equities Trading Mr. Kevin Sampson, Vice President, Business Development & Strategy 5 CSTA