Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Relief granted to an alternative trading system from subsection 7.1(1) of National Instrument 21-101 Marketplace Operation for orders arising as a result of its manual negotiation system subject to certain conditions. Relief was also granted to the alternative trading system from section 4.1, items E(1) and E(2) of Appendix C of OSC Rule 13-502.

Applicable Legislative Provisions

National Instrument 21-101 Marketplace Operation, ss. 7.1(1)

OSC Rule 13-502, s. 4.1

June 29, 2012

In the Matter of the Securities Legislation of Ontario (the Jurisdiction)

and

In the Matter of the Process for Exemptive Relief Applications in Multiple Jurisdictions and In the Matter of Liquidnet Canada Inc. (the Filer)

Decision

Background

The principal regulator in the Jurisdiction has received an application (Application) from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption from:

(i) the requirement in subsection 7.1(1) of National Instrument 21-101 Marketplace Operation (NI 21-101) to provide accurate and timely information regarding orders for the exchange-traded securities displayed on its marketplace to an information processor as required by the information processor or, if there is no information processor, to an information vendor that meets the standards set by a regulation services provider for orders that result from the manual negotiation system (as defined below); and

(ii) the requirement to pay an activity fee of (a) $5,000 in connection with the Application in accordance with section 4.1 and item E(1) of Appendix C of Rule13-502, and (b) $1,500 in accordance with section 4.1 and item E(2) of Appendix C of Rule 13-502 (Exemptions Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission is the principal regulator for the Application, and

(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in Alberta, Manitoba, British Columbia, Saskatchewan, New Brunswick and Quebec.

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

This Decision is based on the following facts represented by the Filer:

The Filer

1The Filer is a corporation existing under the Canada Business Corporations Act.

2The Filer’s head office is in New York, USA and has a branch office in Toronto, Ontario, Canada.

3The Filer is registered as a dealer in the category of investment dealer (or equivalent) by the Ontario Securities Commission, the Autorité des Marches Financiers of Quebec and the Alberta, British Columbia, Manitoba, New Brunswick and Saskatchewan Securities Commissions.

4The Filer operates an alternative trading system (Liquidnet ATS). Where required, the Filer also is registered as an alternative trading system with applicable Canadian provinces.

5The Filer is a member of, and regulated by, the Investment Industry Regulatory Organization of Canada. The Filer also is a member of the Toronto Stock Exchange.

6The Filer does not have any securities listed or quoted on an exchange or marketplace in any jurisdiction inside or outside of Canada.

7Guidance in subsection 5.1(4) of Companion Policy 21-101CP (21-101CP) outlines that the securities regulatory authority may consider granting an exemption from the pre-trade transparency requirements in subsection 7.1(1) of NI 21-101 to a marketplace for orders that result from a request for quotes or facility that allows negotiation between two parties provided that

(a) order details are shown only to the negotiating parties,

(b) other than as provided by paragraph (a), no actionable indication of interest or order is displayed by either party or the marketplace, and

(c) each order entered on the marketplace meets the size threshold set by a regulation services provider as set out in subsection 7.1(2) of NI 21-101.

8The Liquidnet manual negotiation system, as described below, meets the criteria for consideration of granting an exemption to section 7.1 of NI 21-101 as outlined in subsection 5.1(4) of 21-101CP.

Manual Negotiation System on Liquidnet ATS

9The Liquidnet ATS enables its subscribers to enter into direct negotiation with each other for the purchase and sale of large blocks of equity securities (manual negotiation system).

10All negotiations on the Liquidnet ATS are on an anonymous basis. Communication between subscribers during a manual negotiation occurs through the Liquidnet ATS.

11The Filer interfaces with the order management systems of its subscribers, and receives indications from its subscribers. Two indications will be matched on the Liquidnet ATS if certain conditions are met.

12When the Liquidnet ATS’s indication matching engine determines that a match has occurred, it notifies the two subscribers to the match. This notification is communicated through the Liquidnet ATS software.

13Matched indications can be in a passive or active state. If a subscriber’s indication is in a passive state, the contra on the match cannot invite the subscriber to negotiate. If one of the subscribers converts his indication from passive to active, the contra trader can initiate a negotiation with the first subscriber by sending a negotiation invitation. This commences the negotiation process, which takes places on an anonymous basis through the Liquidnet ATS software.

14When submitting a bid or offer in a negotiation, the subscriber specifies a price and quantity. The price can be a fixed price or a mid-peg price where the trade will execute at the mid-point of the national best bid and offer in the overall market at the time of execution.

15The quantity of shares during a negotiation is not displayed to the other side. The only information that a subscriber knows regarding a contra’s quantity is whether the contra’s negotiation quantity is above or below the subscriber’s minimum volume tolerance.

16If a negotiation on the Liquidnet ATS is successful, a trade is executed for the lesser of the negotiation quantities specified by each side.

17The manual negotiation system also can involve one trader manually negotiating against a firm order submitted for manual negotiation. A subscriber utilizing the Liquidnet ATS software can convert an indication to a firm order, referred to by the Filer as a “Supernatural order.” When creating a Supernatural order, a Liquidnet subscriber designates a strategy (also referred to as an algorithm) for executing the order. When a subscriber creates a Supernatural order, the Filer’s systems handle the execution of the order on behalf of the subscriber, which can include as one option, interacting with a manually negotiating contra in the Liquidnet ATS. When a strategy interacts with a manually negotiating contra in the Liquidnet ATS, the Liquidnet ATS automatically handles the negotiation on behalf of the subscriber that has created the Supernatural order. The contra to this type of negotiation is always a manually negotiating party, as a negotiation must always include at least one manually negotiating party. This type of negotiation involves the same process as a negotiation involving two manually negotiating traders.

Order details only shown to the negotiating parties

18In all cases, order details are only shown to the two negotiating parties and limited information is provided to the Filer’s employees involved in the operation of the Liquidnet ATS, as permitted under subsection 7.1(2) of NI 21-101.

No actionable indication of interest or order is displayed by either negotiating party or the marketplace

19No actionable indication of interest or order is displayed by either party other than to each other.

General

20Neither the Filer nor any of its affiliates is in default of securities legislation in any jurisdiction.

Policy Rationale

21The orders executed in the manual negotiation system of the Liquidnet ATS are the culmination of the negotiation process. Because of the unique nature of Liquidnet’s business, the decision will not impact the objective of the pre-trade transparency requirements of section 7.1 of NI 21-101 as the vast majority of trading in the market is not executed through one-to-one negotiation systems like the Liquidnet ATS.

22Given that that the exemption to subsection 7.1(1) of NI 21-101 sought by the Filer was contemplated by the Canadian Securities Administrators, it would be unfair to require the Filer to pay fees in these circumstances.

Decision

The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.

The decision of the principal regulator under the Legislation is that the Exemptions Sought are granted provided that:

(a) order details in the manual negotiation system of the Liquidnet ATS are shown only to the two negotiating parties;

(b) no actionable indication of interest or order is displayed by either negotiating party or by the marketplace, except that each party to a negotiation may communicate its bid or offer to the other negotiating party, as permitted under clause (a); and

(c) all orders to which the Exemptions Sought apply will meet any size threshold set by a regulation services provider as provided in subsection 7.1(2) of NI 21-101.