From the Regulators

Revised guidance aims to help reduce short-term, unexplained price volatility

By James Langton |

Securities regulators are proposing stiffer measures for exchanges and alternative trading systems (ATS) to prevent "flash crash" type market volatility.

The Investment Industry Regulatory Organization of Canada (IIROC) issued proposed guidance Monday that will require all trading venues, including dark pools, to establish thresholds for triggering market-specific trading halts. The guidance aims to help reduce short-term, unexplained price volatility, and to address risks related to electronic trading.

The self-regulatory organization originally proposed guidance in this area back in April 2014. The revised version of that guidance proposes several significant changes to the original, following public consultation. In particular, it would establish specific price thresholds for triggering trading halt, rather than allowing each market to determine its own threshold; and, the requirement will apply to all markets, including dark pools. However, the thresholds would not apply to opening orders or market-on-close orders.

Notwithstanding the changes, IIROC indicates that its revised proposal is based on the same principles that underpinned the original proposals: reducing the need for regulatory intervention, limiting regulatory burden on the industry, and supporting the market-wide operation of price discovery.

"This revised proposal reflects IIROC's commitment to maintaining fair and orderly markets while lessening the need for regulatory intervention," said Wendy Rudd, IIROC's senior vice president, market regulation and policy. "Marketplace thresholds complement a series of IIROC reforms that help enhance market integrity and foster investor confidence."

That list of reforms includes the introduction of single-stock circuit breakers, added controls for traders under the electronic trading rules and market access rules, and changes to the market-wide circuit breakers. Marketplace thresholds are expected to act as a secondary line of defence, after firm-level controls, and before circuit breakers would kick in. Additionally, IIROC has clarified its approach to intervening with erroneous and unreasonable trades.

The latest proposals are out for comment until May 29. Once it is finalized, IIROC expects to issue final guidance that will provide at least a six-month transition period.