Specific Questions Related to Dark Liquidity Rule Amendments

1. Background

Provisions respecting dark liquidity were first introduced in UMIR on October 15, 20121, and were later amended on February 4, 2020.2

The provisions related to dark liquidity resulted from a joint consultation process by the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) (a predecessor organization to CIRO) to address concerns about the impact of non-displayed orders on Canadian marketplaces. The principal changes introduced to UMIR as part of the dark liquidity provisions are to:

• define a “better price” to mean a minimum of one trading increment except, when the difference between the best ask price and the best bid price is one trading increment, a “better price” would be at least one-half of one trading increment;
• provide that an order entered on a marketplace must trade with visible orders on that marketplace at the same price before trading with a “Dark Order” at the same price on that marketplace; and
• require, subject to certain exceptions, an order entered on a marketplace that trades with a “Dark Order” to either:
  • receive a better price, or
  • be for more than 50 standard trading units and have a value of more than $30,000, or have a value of more than $100,000.

2. Questions and Answers

The following are questions on the dark liquidity provisions and CIRO’s response to each question. The scenarios in the responses show how orders must be treated in order to comply with UMIR requirements:

2.1 How is priority of execution impacted when orders are entered on a marketplace that offers both Dark Orders and displayed orders?

Scenario 1a

The “best bid” and “best ask” displayed on protected marketplaces (“PNBBO”) is $10.02-$10.05.

Incoming order to sell 4000 shares IOC with a $10.01 limit is sent to Marketplace A. The sell order can trade:

• 1,000 shares at $10.03 with the Marketplace A Dark Order;
• 2,000 shares at $10.02 with the Marketplace A displayed order; and
• 1,000 shares are cancelled.

UMIR Rule 6.6 Provision of Price Improvement by a Dark Order requires the IOC sell order that executes with a Dark Order to execute at $10.03 or better. The incoming sell order can trade with the Dark Order priced at $10.03 because it is a “better price” as defined in UMIR. The incoming sell order will then execute against the displayed order at $10.02 on Marketplace A. The remaining 1,000 shares of the sell order cannot be executed on Marketplace A because the Dark Order priced at $10.02 is not a “better price” and because the displayed order priced at $10.01 is outside the PNBBO. The remaining 1,000 shares are cancelled by Marketplace A.

Scenario 1b

PNBBO is $10.02-$10.05. Best bid is on Marketplace A only.

Incoming order to sell 3,500 shares with a $10.01 limit is sent to Marketplace A. The sell order can trade:

• 1,000 shares at $10.03 with the Marketplace A Dark Order;
• 2,000 shares at $10.02 with the Marketplace A displayed order; and
• 500 shares at $10.02 with the Marketplace A Dark Order.

The incoming sell order can trade with the Dark Order priced at $10.03 because it is a “better price”. The incoming sell order must then move next to trade against the displayed order at $10.02 because the displayed order has priority over the Dark Order at the same price on the same marketplace. The sell order can then trade against 500 shares of the Dark Order priced at $10.02 because the national best protected bid has shifted to $10.01; therefore $10.02 becomes a “better price”.

Scenario 1c

PNBBO is $10.02-$10.05. Best bid is on Marketplace A only.

Incoming order to sell 6000 shares with a $10.01 limit is sent to Marketplace A. The sell order can trade:

• 1,000 shares at $10.03 with the Marketplace A Dark Order;
• 2,000 shares at $10.02 with the Marketplace A displayed order;
• 1,000 shares at $10.02 with the Marketplace A Dark Order; and
• 1,000 shares at $10.01 with the Marketplace A Dark Order.

The incoming sell order can trade with the Dark Order priced at $10.03 because it is a “better price”. The incoming sell order must then move next to trade against the displayed order at $10.02 because the displayed order has priority over the Dark Order at the same price on the same marketplace. The sell order can then trade against the 1,000 share dark order on Marketplace A priced at $10.02 because the national best protected bid has shifted to $10.01; therefore $10.02 becomes a “better price”. Lastly, the remaining 1,000 shares of the order can trade against the dark order on Marketplace A priced at $10.01. While this order is not a “better price” relative to the best protected bid on Marketplace B that is also priced at $10.01, the sell order on entry to Marketplace A is for more than 50 standard trading units and has a value more than $30,000. Therefore, the order is permitted to trade at the best bid price.

2.2 How is priority of execution impacted when a directed-action order (“DAO”) is entered on a marketplace that offers Dark Orders and displayed orders?

Scenario 2a

The NBBO is $10.00-$10.01.

Incoming DAO order to sell 3,000 shares at $10.00 is sent to Marketplace A. A DAO order is defined in National Instrument 23-101 Trading Rules (referenced in UMIR as the “Trading Rules”) and provides instructions with respect to the application of the Order Protection Rule (OPR).3 When an order is marked as DAO it instructs the receiving marketplace that the order protection obligation is being met by the sender. When a marketplace receives a DAO order the marketplace can carry out the sender’s instructions without checking for potential violations of OPR. The DAO marker does not impact the application of UMIR, including the application of price improvement requirements in UMIR 6.6.4

The DAO sell order can trade:

• 1,000 shares at $10.00 with the Marketplace A displayed order; and
• 2,000 shares will book on Marketplace A at $10.00.

The DAO sell order cannot trade with the Marketplace A Dark Order because it is not a “better price”. The remaining shares can be booked on Marketplace A at $10.00 because the incoming order was marked DAO (even though this would create a locked market).

The Dark Order on Marketplace A can only match with the 2,000 booked shares to sell on Marketplace A at $10.00 if one of the following two events occurs:

• the displayed order on Marketplace B is removed, resulting in the Dark Order on Marketplace A becoming a “better price”; or
• the Dark Order (or a portion of the order) is amended by the Participant to become an active order which can then execute against the booked shares on Marketplace A because it is no longer a Dark Order.

Scenario 2b

PNBBO is $10.10-$10.11.

Incoming DAO order to sell 4,000 shares with a $10.09 limit is sent to Marketplace A. The DAO sell order can trade:

• 1,000 shares at $10.10 with the Marketplace A displayed order;
• 2,000 shares at $10.09 with the Marketplace A displayed order; and
• 1,000 shares will book on Marketplace A at $10.09.

Because the sell order is marked DAO, Marketplace A can match the DAO sell order with its displayed orders without regard to compliance with OPR, as the sender of the DAO sell order takes on this responsibility. The DAO sell order cannot trade with the Marketplace A Dark Order because it is not a “better price”. The remaining shares can be booked on Marketplace A because the incoming order was marked DAO (even though this would create a crossed market).5

The Dark Order on Marketplace A can only match with the 1,000 booked shares to sell on Marketplace A at $10.09 if one of the following two events occurs:

• the displayed order on Marketplace B is removed, resulting in the Dark Order on Marketplace A becoming a better price;6 or
• the Dark Order (or a portion of the order) is amended by the Participant to become an active order which can then execute against the booked shares on Marketplace A at $10.09 because it is no longer a Dark Order.

2.3 Do the dark liquidity provisions change a Participant’s obligation to mark all orders entered on a marketplace for “displacement” purposes as “bypass”?

No. If a Participant sends a DAO order to a “protected marketplace”7 to trade with the “disclosed volume”8 and does not mark the order “bypass”9, the Participant takes on the risk of interacting with undisclosed orders. If the DAO order is sent with sufficient volume and is at a price that will fill the disclosed volume but is not marked “bypass” and encounters interference from undisclosed orders on the marketplace, the Participant will have traded-through a portion of the disclosed volume on the marketplace contrary to the Trading Rules.10 CIRO has previously issued guidance on the use of the bypass order marker.11

2.4 Can an intentional cross execute at a fractional trading increment?

Yes. Intentional crosses may be entered at a price which is a fraction of a trading increment provided the execution price is a better price for both the order to purchase and the order to sell. For example, if the best bid price is $10.02 and the best ask price is $10.05, an intentional cross can be completed at any price from $10.03 up to and including $10.04.

2.5 May “small” client orders that are subject to the Order Exposure Rule be entered on a non-transparent marketplace or facility?

Rule 6.3 of UMIR requires, subject to certain enumerated exceptions, that client orders to purchase or sell 50 standard trading units or less of a security be immediately entered on a marketplace. As such, the obligation applies to a client order to purchase or sell:

• 5,000 or less units of a security trading at $1.00 or more per unit;
• 25,000 or less units of a security trading at $0.10 or more per unit and less than $1.00 per unit; and
• 50,000 or less units of a security trading at less than $0.10 per unit.

The purpose of the rule is to ensure that client orders are exposed to the market. The exposure of such client orders contributes to the operating of the price discovery mechanism to establish the “best bid price” and “best ask price” used in various UMIR provisions.

The policy objectives behind Rule 6.3 are not met if the client order is entered on a marketplace that does not provide information on the order to an information vendor for inclusion in a consolidated market display. Effective March 9, 2007, Rule 6.3 was amended to require the entry of a client order that is subject to Rule 6.3 to be on a marketplace that discloses order information in a consolidated market display.12 Additionally, effective October 15, 2012, Rule 6.3 was further clarified to ensure that any order required to be entered on a transparent marketplace is “for display” in a consolidated market display.13

In the view of CIRO, client orders which are routed to a non-transparent marketplace or facility to determine if liquidity is available on that marketplace or facility at prices that are better than displayed in a consolidated market display would comply with the requirements of Rule 6.3 provided any unexecuted portion of the client order was then immediately entered on a marketplace that provides order transparency.

3. Applicable Rules

UMIR Rules this Guidance Note relates to:

• UMIR 1.1
• UMIR 6.3
• UMIR 6.6

4. Previous Guidance Note(s)

This Guidance Note replaces:

• IIROC Notice 12-0295 – Specific Questions Related to Dark Liquidity Rule Amendments (October 9, 2012)

5. Related Documents

This Guidance Note is related to the following Guidance Notes:

• CIRO Guidance Note GN-URPART6-26-0006 – Specific Questions Related to the Use of the Bypass Order Marker (March 20, 2026)

• 1See IIROC Notice 12-0130 – Rules Notice – Notice of Approval – UMIR – Provisions Respecting Dark Liquidity (April 13, 2012) and IIROC Notice 12-0158 – Rules Notice – Notice of Implementation – UMIR – Changes to Implementation Date for Provisions Respecting Regulation of Short Sales and Failed Trades and for Provisions Respecting Dark Liquidity (May 8, 2012).
• 2See IIROC Notice 19-0134 – Rules Bulletin – Approval/Implementation – UMIR – Amendments Respecting Provision of Price Improvement by a Dark Order (August 8, 2019).
• 3See National Instrument 23-101 Trading Rules, Part 6.
• 4See Companion Policy to National Instrument 23-101 for additional information related to the definition of a “directed-action order”.
• 5To address an internally crossed market, a marketplace may re-price Dark Orders.
• 6The execution price would be at $10.10 to achieve the “better price” over the best bid at $10.09 on Marketplace C.
• 7UMIR defines a “protected marketplace” as a marketplace that displays “protected orders” as defined in National Instrument 23-101.
• 8See UMIR 1.1 definition of “disclosed volume”.
• 9See UMIR 1.1 definition of “bypass order”.
• 10See National Instrument 23-101 Trading Rules, section 6.4
• 11CIRO Guidance Note GN-URPART6-26-0006 - Specific Questions Related to the Use of the Bypass Order Marker (March 20, 2026).
• 12See Market Integrity Notice 2007-002 – Provisions Respecting Competitive Marketplaces (February 26, 2007).
• 13See IIROC Notice 12-0130 – Rules Notice – Notice of Approval – UMIR – Provisions Respecting Dark Liquidity (April 13, 2012).