Canada regulators tighten trading rules

* Onus on trading venues to ensure best prices

* Order protection rule to come into effect Feb 2011

By Jennifer Kwan

TORONTO, Nov 13 (Reuters) - Rule changes announced on Friday will put the onus on Canadian stock trading venues to guarantee the best possible prices for investors buying and selling shares in the country's increasingly fragmented marketplace.

The key change is to create an "order protection rule", which means each marketplace must have policies and procedures in place to prevent so-called trade-throughs, essentially where a trade is executed at an inferior price, said the Canadian Securities Administrators (CSA).

The CSA is the umbrella organization for the country's 13 provincial and territorial securities watchdogs.

"It's just more efficient to put the onus on marketplaces rather than on 200 different dealers trying to ascertain where the best price is," said Susan Copland, a director at the Investment Industry Association of Canada (IIAC), which represents about 200 investment dealers.

Currently, investment dealers are required to ensure best prices. As alternative trading systems (ATSs) emerged in Canada in the past several years, dealers had to build or lease costly technology to work with more and more markets and, in some cases, making it difficult to comply.

Under the rule changes, a trading venue would be required to send an order away to a rival offering a better price, using technology known as a "smart order router."

The move to put the onus on trading venues mimics a rule in the United States known as Regulation NMS. However, in Canada, the rule would involve finding best prices through the "full depth of book," which essentially makes it more time consuming and costly to comply, the IIAC has said.

Another concern is that the CSA did not enact caps on trading fees, which dealers say have risen, in part, because trading is now done on multiple marketplaces, said Copland.

Apart from order protection, other key rule changes include prohibiting investors from intentionally "locking" markets -- a practice that could make trading unfair for some participants.

"These amendments, the order protection rule in particular, will help maintain investor confidence in the integrity of the Canadian market, which has rapidly evolved into a multiple marketplace environment," said Jean St-Gelais, chairman of the CSA and chief executive of Quebec's securities watchdog, the Autorite des marches financiers.

Canada's dominant exchange is the Toronto Stock Exchange, run by TMX Group Inc (X.TO), which also operates the junior TSX Venture Exchange and Montreal Exchange derivatives market. Other trading venues include Alpha Group, backed by the dealer units of Canada's big banks, as well as Instinet's Chi-X Canada and Pure Trading.

The CSA said the order protection rule will come into effect on Feb. 1, 2011. All other changes will come into effect on Jan. 28, 2010.

The difference in time reflects a transition period for the marketplace to prepare for the implementation of the order protection rule, the CSA said. (Reporting by Jennifer Kwan; editing by Rob Wilson)