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TORONTO (Reuters) - Canadian securities regulators are concerned that domestic investment dealers are routing large amounts of retail equity orders to their U.S. counterparts, provincial watchdogs said on Monday.
The regulators are worried about losing valuable liquidity to the much larger U.S. market, where, unlike in Canada, wholesalers can offer payments for order flow. Retail orders make up around one quarter of Canada's domestic market.
The Canadian Securities Administrators, the council of Canada's provincial and territorial securities regulators, said the orders being sent south were not meeting minimum requirements for price improvement and would hurt Canada.
"Specifically, the CSA are concerned that widespread routing of retail order flow to U.S. dealers will negatively impact the quality of the Canadian market, and may affect the quality of execution achieved for investors," the group said in a statement.
In Canada, there is no rule preventing a broker from accepting cash in return for stock orders, but there is one that prevents Canada-based firms from making the payments for stock orders in the first place.
There is no such restriction in the United States. "Payment for order flow," however, has been on the radar of U.S. securities regulators, which have sent out subpoenas and other requests for information about how conflicts of interest may affect best execution.
Toronto Stock Exchange operator TMX Group Ltd cited the migration of orders as a major impetus for its October announcement of a plan to offer rebates for active order flow on its smaller Alpha exchange.
Reporting by Alastair Sharp; Editing by Lisa Von Ahn