January 8, Mr. James Twiss Investment Industry Regulatory Industry of Canada Suite King Street West Toronto ON M5H 3T9

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1 January 8, 2010 British Columbia Securities Commission Alberta Securities Commission Saskatchewan Securities Commission Manitoba Securities Commission Ontario Securities Commission New Brunswick Securities Commission Securities Office, Prince Edward Island Nova Scotia Securities Commission Securities Commission of Newfoundland & Labrador Registrar of Securities, Northwest Territories Registrar of Securities, Nunavut Registrar of Securities, Yukon Territory c/o John Stevenson, Secretary Ontario Securities Commission 20 Queen Street West Suite 1903, Box 55 Toronto ON M5H 3S8 M e Anne-Marie Beaudoin Directrice du secrétariat Autorité des marches financières Tour de la Bourse 800 Square Victoria C.P e étage Montréal (Québec) H4Z 1G3 courriel : consultation-en-cours@lautorite.qc.ca Mr. James Twiss Investment Industry Regulatory Industry of Canada Suite King Street West Toronto ON M5H 3T9 RE: Joint Canadian Securities Administrators / Investment Industry Regulatory Organization of Canada Consultation Paper Dark Pools, Dark Orders and other Developments in Market Structure in Canada BMO Nesbitt Burns Inc (BMO) welcomes the opportunity to provide comments on the CSA/IIROC Joint Consultation Paper on Dark Pools, Dark Orders, and Other Developments in Market Structure in Canada. BMO is fully supportive of the IIROC and CSA objectives of promoting competition towards developing a market that promotes liquidity, transparency, price discovery, fairness and integrity. BMO is also fully supportive of the consultation process that IIROC and the CSA are undertaking

2 to address key issues that impact market structure in Canada. BMO would welcome the opportunity to participate in the upcoming roundtable on these issues. Following are BMO s specific responses to the questions posed in the Consultation Paper: Questions relating to Dark Pools Question 1: While trading on Dark Pools has not been extensive in Canada, please provide your views on the actual and/or potential impact of Dark Pools on: a) Order size b) Price discovery c) Liquidity d) Market fragmentation e) Trading strategy f) Client instructions In your view, what will be the potential impact if the market share of Dark Pools in Canada increases significantly? One need only look at the U.S. marketplace to determine that the potential exists for growth in both the number of dark pools and the percentage of market share they represent. The impact of such growth will depend largely on the nature of the dark pools that come to market. Traditionally dark pools were designed to be anonymous pools of liquidity striving to match size orders with one another, often times through call auctions scheduled discretely throughout the trading day. More recently we have seen a global trend towards continuous matching engines that trade smaller orders, designed to reduce trading fees and internalize flow rather than facilitating size discovery. Size-discovery-seeking dark pools add value to the entire marketplace by allowing large orders that would most likely not be placed on a visible market, to transact against one another while limiting the pre-trade information leakage that can result in excess market impact. Continuous matching engines, on the other hand, save fees for the provider but do not necessarily benefit the marketplace as a whole. Such continuous matching engines compete with visible marketplaces for orders. In many instances dark pools attract such passive order flow by offering features that visible marketplaces are not able to offer. One such example in the Canadian market is the ability to trade dark orders at sub-penny increments while visible orders can only be placed at penny increments (on stocks trading over $1). If such internalization pools were to gain considerable market share by offering sub-tick price improvement that is, allowing orders to jump in front of visible orders by less than the minimum tick we risk dis-incenting the visible passive order flow that underlies the price discovery mechanism. It is imperative that visible passive orders are rewarded for their participation in the price discovery process. We must ensure that any dark pools whether legacy dark pools currently in existence or new ones developed by marketplaces and/or broker dealers do not operate in such a way that greater participation by more entrants will significantly detract from overall market quality. As such, we are of the belief than sub-tick price improvement should be banned from all dark pools unless they can reasonably demonstrate size discovery that compensates the marketplace, no matter how small said dark pool may be. Once one dark pool is allowed to offer such sub-tick trading, all new entrants will reasonably expect to have similar capabilities. While Dark Pools have experienced limited success in Canada to date, we believe the potential impact of Dark Pools to be:

3 a) Order size: Average order size in Canada, and elsewhere around the globe, has fallen significantly in recent years. We don t believe that growing success of Dark Pools will result in a further significant reduction in size. b) Price discovery: We are concerned that a regulatory environment that creates an uneven playing field between visible order books and dark pools has the potential to incent flow to move away from the visible books and impair the price discovery process. As such we feel it is important that regulators consider how traders are being incented while creating rules for both dark pools and dark order types. c) Liquidity: The fundamental value proposition of any dark pool should be the addition of greater instantly tradable liquidity to a marketplace. If properly designed, and well used, a dark pool should have a net positive effect on liquidity. d) Market fragmentation: While the addition of any marketplace, either lit or dark, creates the potential for greater fragmentation, we believe that most dealers have the technology to deal with such fragmentation. While the notion of a marketplace with 40+ trading venues as is currently the case in the U.S. may create serious issues, we don t believe the addition of a handful of well designed dark pools will cause any greater concerns than the recent flurry of lit markets. e) Trading Strategy: The impact of successful dark pools on trading strategy will be largely influenced by the structure and rules of the dark pools involved. Where dark pools are aimed at creating true size discovery, we envision institutional clients employing such pools to mitigate impact costs. On the other hand where dark pools are aimed at midmarket crossing and internalization, we would envision the pools being employed by arbitragers and liability desks to a greater extent. f) Client Instructions: see above Question 2: Please provide your views on whether there should be a minimum size requirement for orders entered on Dark Pools? While we don t believe that minimum size requirements should exist for dark orders or dark pools (except perhaps a minimum of 1 board lot) we do believe a minimum size should be in place for any feature that cannot be offered to visibly displayed orders as we argued above. The approach taken by FINRA in the UK, which limits sub-tick trading to dark orders over a minimum size, seems like a reasonable approach that allows large orders to match up in the marketplace while restricting trading strategies from jumping ahead of large bids or offers for small size and thus dis-incenting the placement of visible orders in the book. Question 3: Please provide your views on whether Dark Pools should be permitted to send IOIs? If so, what information should be permitted to be included? We are in favour of IOIs that are used in a selective manner to attract likely contra flow, but not in favour of marketplaces either lit or dark systematically sending out IOIs to a subset of the market which would have the effect of creating a two-tiered market. Where a dark pool uses technology (e.g. blotter scrapping) to identify highly likely contra side liquidity, on large orders, and then send IOIs to only those involved, we believe the resulting size discovery creates sufficient benefit to justify such IOIs. Where a dark pool blindly blasts out IOIs to a small number of preferred subscribers who have limited, or no, fiduciary responsibility to the end client there is significant risk or informational asymmetry creating unfair arbitrage opportunities for the preferred subscribers. The notion that a market participant could buy such preference could significantly impair market confidence.

4 Question 4: Please provide your views whether or not Dark Pools should be permitted to select which destinations are able to receive IOIs? In your view should the ability to select which destinations receive IOI s be offered to subscribers? We believe that subscribers should have the ability to select which if any destinations should receive IOIs related to their orders. Question 5: In your view, when does an IOI provide sufficient information to require it to be treated like an order that should be subject to pre-trade transparency requirements? Any IOI sent from a marketplace that gives sufficient information for a recipient to know or reasonable infer some knowledge of side, price and size should be subject to pre-trade transparency requirements. The SEC proposal on Dark Pools does a good job of flushing this point out. Question 6: In your view what kind of transparency about the practice of sending IOIs should be made by Dark Pools to their subscribers? We believe that all marketplaces lit or dark should be fully transparent about all matching, routing and advertising policies and make this information available to all market participants. It would appear in the U.S. that some participants have had better information about the policies of some trading venues and thus have been better able to game the markets. We strongly believe that the fully transparent disclosure of rules and procedures by all trading venues is crucial to achieving the highest levels of investor confidence in our markets. Question 7: Should Dark Pools be required to provide full or partial transparency of their orders if a threshold of trading activity is reached? We believe that full transparency should be required when certain trading thresholds are reached as this information is fundamental to the price discovery process. Question 8: What are your views on the fairness of broker-preferencing? While we are agnostic on the continuation of broker-preferencing, we do strongly suggest the Regulators consider the potential consequences of eliminating this feature from our markets. If such elimination creates a catalyst for certain dealers to build proprietary internalization dark pools that further fragment our markets, then the net result of such action may be negative. We believe it is of utmost importance that the Regulators finalize rules for dark pools before eliminating the broker-preferencing feature. Question 9: Are there other issues that should be considered in connection with Dark Pools? Not at this time. Questions relating to Dark Orders

5 Question 10: Please comment on the actual and/or potential impact, if any, of Dark Orders on: a) Price discovery b) Liquidity c) Clients execution instructions d) Trading strategy? We are of the opinion that dark orders should be governed by the same rules regardless of the venue they reside on. As such, our answers on dark orders are similar to our previous answers on dark pools. We believe that dark orders can create a valuable mechanism for size discovery and incent larger orders to reside within the market. At the same time, we are concerned that should such dark orders receive treatment that is preferential to visible orders, we may dis-incent the placement of such visible orders that underlie the price discovery mechanism. Dark orders can significantly increase the instantly achievable liquidity within a market and allow for more flexible and innovative trading strategies. That said we should ensure that visibly placed orders must be compensated for their contribution to price discovery, and for the increased risk of gaming associated with such visibly placed passive orders. a) Price discovery: We are concerned that a regulatory environment that creates an uneven playing field between visible orders and dark orders has the potential to incent flow to move away from the placing visible orders and harm the price discovery process. As such we feel it is important that regulators consider how traders are being incented while creating rules for both dark pools and dark order types. b) Liquidity: The fundamental value proposition of any dark order should be the addition of greater instantly tradable liquidity to a marketplace. If properly designed, and well used, a dark order type should have a net positive effect on liquidity. c) Trading Strategy & Client Instructions: The impact of successful dark pools on trading strategy will be largely influenced by the structure and rules of the dark pools involved. Where dark pools are aimed at creating true size discovery we envision institutional clients employing such pools to mitigate impact costs. On the other hand where dark pools are aimed at mid-market crossing and internalization we would envision the pools being employed by arbitragers and liability desks to a greater extent. Question 11: Please comment on the effect, if any, of the interaction of Dark Orders with visible limit orders on fairness and price discovery. We remain concerned about dark orders trading ahead of visible orders. We would look for a mechanism that would always give visible orders priority over execution. We believe the recently introduced bypass marker along with the proposed trade-through protection requirements which favour visible orders, go some way towards addressing this issue. Question 12: Should there be a minimum size requirement for certain Dark Orders? If yes, please explain? As we have stated above, we believe that any dark order type that receives benefits not granted to visible orders should be limited to orders of significant size. For example, mid-point matching or sub-penny price-improving orders should be for a size several multiples greater than the average trade. Allowing average sized orders to derive significant benefit by going dark will logically incent traders to move from visible order placement to more dark orders thus detracting from the visible order book that underlies the price discovery mechanism.

6 Question 13: Should a transparent marketplace allow fully-hidden orders to post at prices inside the prevailing spread (or should at least a portion of the order be required to be exposed thereby narrowing the spread)? We have no issue with fully-hidden orders within the spread as long as they adhere to the minimum tick rules currently in place for visible orders. Question 14: Should marketplaces be required to provide priority to visible orders over Dark Orders at the same price? We believe that visible orders should always have priority over same-priced dark orders. Question 15: Are there other issues that should be considered in connection with Dark Orders? Not at this time. Questions relating to market pegged orders Question 16: Please comment on the actual or potential impact if any, of market pegged orders on: a) Price discovery b) Fairness Pegged orders have long been offered by marketplaces and broker dealers. We see no reason to restrict trading venues from offering similar products. Question 17: Although this paper has not specifically addressed pegged orders that execute at the mid point of the NBBO, in your view, should market pegged orders be allowed to execute at prices unavailable to transparent orders (e.g. at a price between the bid and the ask when the spread is a single trading increment)? As stated above, we don t believe that orders should be allowed to execute at sub-tick increments. Allowing such matching penalizes those participants that have placed visible bids and offers and endured the risks associated with such order placement. We strongly advocate that visible orders must be protected or we risk dis-incenting market participants from placing such orders. Question 18: Although this paper has not specifically addressed pegged orders that are fully-hidden, in your view are there any issues that arise due to fully-hidden market pegged orders? See response to question 17 above. Question 19: Are there other issues that should be considered with regard to market pegged orders? Not at this time.

7 Question 20: What is your view of a marketplace SOR taking into consideration hidden liquidity posted on that marketplace when making routing decisions? Is it appropriate? Should the information be required to be provided to other participants? Should a marketplace s SOR be allowed to take into account hidden liquidity only after all visible liquidity at the same price on all marketplaces is executed against? We believe that marketplace SORs should be allowed to consider any and all information within the marketplace subject to certain requirements. We believe that all marketplaces should be obligated to give fully transparent details on the workings of such routers such that all market participants can make educated decisions regarding the use of both the given marketplace and its SOR. Question 21: Is the practice of a SOR taking into account hidden liquidity posted on a marketplace an example of internalization of order flow? What are the similarities and differences with a dealer internalizing order flow? This practice is indeed an example of internalization as this information is selectively available to certain marketplaces and market participants. Of concern, is the fact that some market participants, who are providing the hidden liquidity, may not be aware this information is being used by these SORs for order routing decisions. We believe this can be addressed through full disclosure as noted in our response to question 20. We believe there is little difference between a marketplace's SOR internalizing order flow and a dealer doing so. Question 22: What are your views on internalization generally? We believe that internalization is a fundamental feature of equity markets, used by marketplaces and participants alike. We believe that internalization can create benefits for investors if internalized flow is executed at a price better, or no worse, than the visibly posted market. Question 23: What is your view on databasing? Databasing can result in smarter order routing decisions that limit gaming by other market participants and can result in more favourable trade execution. We have no problem with a SOR using publically available information towards making better order routing decisions which are based on historical routing patterns. While we believe this technology can enhance routing decisions towards achieving best execution, we are also concerned about the disparity in fairness this may create if some SORs utilize this technology while others don t. Question 24: Please comment on whether there are there other issues that should be considered in connection to SORs using hidden liquidity in routing decisions? Not at this time. Other questions Question 25: Are there any other issues not discussed in this paper that should be considered for discussion at the roundtable that will be convened after the publication of this paper?

8 Over the past few years the Canadian marketplace has seen considerable change given the introduction of new marketplaces, market participants and trading technologies. We believe that this is an excellent time to review the impact that these various changes have had on the Canadian market. The list of issues that should be reviewed includes, but is not limited to: Marketplace access (naked access, sponsored access, co-location, memory sharing) Trading fees (active fee caps, passive rebate arbitrage) High frequency trading Market data fees Order to trade ratios (and impact on infrastructure costs) Such a strategic review should consider the stated goals of our marketplace and determine which features are contributing to these goals and which are not. Question 26: In what way if any, do you believe that the combined potential impact of these developments represents risk to the market? Should the marketplace allow new technologies to profit at the cost of traditional investors we may see increased trading volumes but declining investment resulting in potentially increased financing costs for Canadian Corporations. It is therefore imperative that we as an industry consider the entire investment ecosystem when considering new rules, technologies or marketplace innovations. We thank the CSA and IIROC for this opportunity to comment on Joint Consultation Paper, and would welcome the opportunity to participate in the roundtable forum described in the comment paper. Sincerely, Doug Clark Managing Director, BMO Capital Markets. c.c. Patrick Cronin Denis Desmarais James Ehrensperger Mike Miller Naresh Tejpal

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

CANADIAN SECURITY TRADERS ASSOCIATION, INC. P.O. Box 3, 31 Adelaide Street East, Toronto, Ontario M5C 2H8 December 24, 2008 Alberta Securities Commission Autorité des marchés financiers British Columbia