Following a recent episode of aberrant trading caused by automatic stop loss orders, the Investment Industry Regulatory Organization of Canada (IIROC) issued final guidance Thursday on dealers’ obligations to protect market integrity when using these sorts of orders.
Earlier this month, IIROC announced that it decided to alter a series of trades in late June after the shares of Inter Pipeline Fund traded at unreasonable prices; an episode that it attributed largely to the automatic triggering of stop loss orders by traders with long positions in the stock. (See Investment Executive, IIROC altered Inter Pipeline trades, July 3, 2013.)
Thursday’s guidance aims to address concerns about the “ongoing incidence” of trades that require regulatory intervention due to the automated execution of stop loss orders. In its notice, IIROC says that this updated guidance supplements prior guidance about dealers’ best execution obligations and the management of orders when executing a triggered stop loss order.
The notice provides additional guidance on the use and management of stop loss orders, and also takes into account requirements adopted under the electronic trading rule (ETR) amendments, which became effective March 1. It reminds dealers that the ETR requirements are applicable to all orders sent to a market electronically, including stop loss orders, and to the triggering and subsequent execution of stop loss orders.
“When multiple stop loss orders are triggered and executed without regard for their impact, investor confidence is unnecessarily compromised,” said Wendy Rudd, IIROC’s senior vice president, market regulation and policy. “This guidance confirms that dealers are responsible for the appropriate execution of their clients’ orders, and for the maintenance of fair and orderly markets. Regulatory intervention by IIROC should be required only in exceptional circumstances.”
IIROC says that it intends to continue monitoring the impact of stop loss orders on fair and orderly markets, and that it will assess whether additional regulatory steps are required.