Securities regulators are seeking comment on proposed new guidance dealing with the breaking of trades.

The Investment Industry Regulatory Organization of Canada has published proposed guidance for comment that sets out the circumstances in which it would intervene in order to vary or cancel a trade. The guidance aims to make the criteria for this sort of regulatory intervention more transparent.

Regulators’ policies for breaking trades came under scrutiny in the wake of the “flash crash” on May 6, when markets plunged due to an imbalance of sell orders, and regulators went back and unwound some of the trading that took place that day.

As IIROC explains in a notice setting out the proposed guidance and seeking comment, the experience on May 6 “indicated that the process used by the exchanges in canceling trades was not sufficiently clear or transparent”. As a result, U.S. regulators have revised their policy to set more transparent standards for breaking trades.

Moreover, IIROC says that the Canadian approach to regulatory intervention “has diverged” from what has developed in the U.S. and other foreign jurisdictions. “In particular, the discretion exercised by IIROC regarding intervention in trading has remained broader and less transparent than other jurisdictions,” it says.

IIROC is seeking comment on all aspects of the proposed guidance, including whether it should continue to vary the price of erroneous trades, or just cancel them, as the U.S. exchanges do; and whether the threshold for intervention should be affected by the proposed introduction of single-stock circuit breakers in Canada (also in response to the flash crash).

Comments on the proposed new guidance from IIROC is due by February 14, 2011.

IE