From the Regulators

All “actively traded” securities will be covered when new guidance takes effect in February 2015

By James Langton |

Market regulators are preparing to expand the use of single-stock circuit breakers, a measure that was developed to help curb excess volatility in the wake of the "flash crash" in 2010.

The Investment Industry Regulatory Organization of Canada (IIROC) published new guidance Thursday that will expand its single-stock circuit breaker (SSCB) program to a wider selection of securities. The guidance is slated to take effect on Feb. 2, 2015.

When it does, all securities that are considered "actively traded" will be covered by the SSCB program. Currently, only stocks that belong to the S&P/TSX Composite Index are subject to it, along with certain exchange-traded funds. Now, stocks will be considered actively traded if in the three previous months, they trade an average of at least 500 times per day, with an average trading value of at least $1.2 million per day.

The guidance indicates that this approach will cover securities that account for a "significant portion" of total trading activity. Based on data from February 2013, it says SSCBs would apply to approximately 9% of listed securities, but approximately 88% of total trades and approximately 92% of the total value traded.

The circuit breakers will apply from 9:30 am to 3:30 pm, and, if triggered by sudden unexplained price movement, will result in a five-minute trading halt. Typically, a halt will be triggered by a move of at least 10% up or down in a five-minute period. However, in the first 20 minutes immediately after the market opens (9:30 a.m. – 9:50 a.m.), which IIROC says is "a period of natural volatility", a 20% price move will be required to trigger a circuit breaker.

This approach is designed to avoid unnecessary halts. "It is important that SSCBs are not applied too widely and inadvertently capture price movements that may be representative of the normal trading patterns of a particular security, such as those securities which are less liquid, lower value and historically demonstrate higher short-term volatility," it notes.

IIROC also says that it expects, given the volume and speed of trading in the current market, that sometimes trades will occur after an SSCB is triggered, but before a trading halt can be imposed across all marketplaces. In those cases, the guidance says, regulatory officials will cancel any trade that is more than an additional 5% beyond the trigger price, "as these trades are clearly in a zone where a person would not have had a reasonable expectation of execution at that time." Any trades that execute at a price less than an additional 5% beyond the trigger price will stand, it notes.

The introduction of SSCBs aims to mitigate excess market volatility, IIROC notes. Along with measures such as, enhanced electronic trading controls, revised market-wide circuit breakers, and updated policies for dealing with erroneous trades, it says that they help to maintain fair and orderly markets, and bolster investor confidence.