The International Organization of Securities Commissions (IOSCO) is calling on trading venues and regulators to adopt measures to deal with episodes of extreme volatility to help guard against sudden market crashes.
IOSCO has been developing a set of recommendations designed to help both marketplaces and regulators adopt mechanisms to manage extreme volatility and preserve orderly trading in the wake of events such as the “flash crash” of 2010, which began in the U.S., and spread to Canada’s markets.
In a new report, IOSCO endorses the use of volatility control mechanisms such as circuit-breakers and price limits, which halt or constrain trading in the face of issues such as erroneous orders that can disrupt trading. The group of global regulators says that it believes that these mechanisms bolster market fairness and efficiency, “increasing market integrity and investor confidence.”
As a result, IOSCO recommends that trading venues implement mechanisms to manage extreme volatility. It also makes recommendations for operating these controls to ensure they’re working as intended; it calls for information sharing between trading venues when their controls are triggered; and it recommends that markets make the details of these mechanisms transparent to regulators, the market and the public.