Specific Questions Related to the Use of the Bypass Order Marker

1. Background

The use of a bypass order (and the associated designation required under UMIR 6.2) assists Participants in satisfying obligations to fill an order by a provision of UMIR or a Policy, and indirectly, trade-through obligations under the Order Protection Rule (OPR) contained in Part 6 of National Instrument 23-101 Trading Rules (NI 23-101). When entered on a “protected marketplace”1, a bypass order will only execute against the “disclosed volume”2 on that marketplace and not against other orders such as those that are not displayed or partially displayed (e.g., “iceberg orders”). When entered on a marketplace that is not a protected marketplace, a bypass order will only execute against the displayed orders on that marketplace that would have been included in the disclosed volume if that marketplace was a protected marketplace.

2. Questions and Answers

2.1 Is a Participant required to mark all orders entered on a marketplace for “displacement” purposes as “bypass”?

No. However, if a Participant sends an order to a protected marketplace to trade with the disclosed volume on a marketplace, and does not mark the order as a bypass order, the Participant risks having the order interact with undisclosed volume. To the extent that the protected marketplace supports hidden orders, iceberg orders, or allows orders with special terms or other specialty-priced orders (see UMIR definition of “disclosed volume” for specific examples) to “crossover” into the regular trading book, the failure to mark an order as a “bypass order” increases the risk that the order may not trade exclusively with the disclosed volume, and may expose the Participant to additional displacement obligations. In particular, even where a Participant enters an order or multiple orders on one or more protected marketplaces that are of a sufficient volume and at prices that will trade with the disclosed volume, if the order or orders are not marked as a bypass order and encounters interference from hidden or partially hidden orders on one or more marketplaces, the Participant is at risk of trading-through (or “offering-through” or “bidding-through”) a better-priced protected order.

For these reasons, if a Participant enters into a “designated trade”3 (including an intentional cross or pre-arranged trade that would be outside the price parameters of a “designated trade”), the use of the bypass marker is recommended on all orders sent to displace better-priced orders on other protected marketplaces to avoid interference from undisclosed liquidity.

2.2 Does the execution of an order marked “bypass” set the “last sale price”?

Depending on how a bypass order is used, it may establish the last sale price under UMIR. When a bypass order is entered on a marketplace to displace better-priced orders, it will set the last sale price (at the lowest or highest price traded as a result of the bypass order).

A bypass order may also be part of a designated trade (i.e., an intentional cross). When executed, these orders are commonly referred to as “bypass crosses”. When executed as part of a designated trade, if a bypass order is executed at the same time as any displacement trade(s) it will set the last sale price under UMIR. However, if the execution of an intentional cross (i.e., the “bypass cross”) occurs after the displacement order(s) in a “two-step process”, the “bypass” intentional cross is treated as an “as of” trade and, as such, would not set the last sale price.

2.3 Must orders being managed by a Smart Order Router (“SOR”) used by a Participant be marked “bypass”?

Not necessarily. Certain SORs are designed to route orders that will trade only at the best displayed price. If the SOR employs an “iterative” approach (routing orders to the best displayed quote and then reassessing the best bid and offer on each protected marketplace after each fill), then the bypass marker will not be necessary as there is no risk of trading at a price that is outside the best protected bid or offer.

However, SORs that utilize a “spray” methodology (sending orders to multiple marketplaces simultaneously), should mark any orders that may trade outside the best protected bid or offer as bypass if the order is sent to a marketplace that permits hidden or partially hidden volume, or the “crossover” of special terms or specialty-priced orders that are not displayed in the disclosed volume.

2.4 May a bypass marker be used on orders that are for less than a standard trading unit?

Yes. If a marketplace accepts bypass orders that are for less than a standard trading unit, a Participant may mark the order bypass.

3. Applicable Rules

UMIR Rules this Guidance Note relates to:

• UMIR 1.1
• UMIR 6.2

4. Previous Guidance Note(s)

This Guidance Note replaces:

Guidance Note 09-0128 – Specific Questions Related to the Use of the Bypass Order Marker (May 1, 2009).

• 1UMIR defines a “protected marketplace” as a marketplace that displays “protected orders” as defined in NI 23-101.
• 2See UMIR 1.1 definition of “disclosed volume”.
• 3A “designated trade” is defined as an intentional cross or pre-arranged trade of a security made at a price that:
  • would not be less than the lesser of:
    • 95% of the best bid price, and
    • 10 trading increments less than the best bid price, and
  • would not be more than the greater of:
    • 105% of the best ask price, and
    • 10 trading increments more than the best ask price.