Proposed guidance would require exchanges to adopt price and volume thresholds to avoid trading volatility

In a bid to prevent “fat finger”, and other types of erroneous trades, securities regulators are proposing new guidance that would require trading venues to adopt volatility controls designed to prevent these sorts of trades in the first place.

The Investment Industry Organization of Canada (IIROC) Thursday published Proposed Guidance on Marketplace Thresholds, which would require exchanges and alternative trading systems to adopt price and volume thresholds designed to avoid short-term, unexplained trading volatility. IIROC is not seeking to impose standardized controls, noting that each market should adopt thresholds that are appropriate for the type of trading that takes place on that market.Instead, the proposed guidance is principles based. Chiefly, it says that a market’s controls should be designed to prevent the execution of orders at prices that would otherwise require regulatory intervention by IIROC.

“Only in rare circumstances should it be necessary for the clearly erroneous order to be caught by [circuit breakers] or by [regulatory intervention],” it says. Instead, these types of trades should be prevented by dealer and marketplace controls.

Additionally, the guidance indicates that these volatility controls should be designed to minimize the impact on price discovery and access to “tradable” liquidity; and, they should not impose a regulatory burden (including the need for technological changes) on other markets, service providers, regulators, dealers, or other players.

These controls would not be required for dark pools. They would have to be disclosed by the various markets that do adopt them.

IIROC says that these sorts of controls should operate as a second line of defence for preventing erroneous trades from being executed, and that they should work in concert with other measures designed to curb excessive volatility, such as circuit breakers and dealer controls.

“Together with related IIROC initiatives, including circuit breakers and new risk controls at the dealer level, marketplace thresholds are important to enhancing investor confidence and market integrity,” said IIROC senior vice president, market regulation and policy, Wendy Rudd.

“These mechanisms will help to reduce the number of erroneous trades and unexplained price movements, and lessen the need for IIROC intervention,” she added.

The proposal is out for comment until July 3.