Global securities regulators are proposing guidance for both trading venues and regulators designed to ensure that they have mechanisms in place to deal with extreme volatility, whether driven by “fat finger” trades, investor panic or automated trading.
The International Organization of Securities Commissions (IOSCO) proposed a set of recommendations on Wednesday for trading venues (such as stock exchanges and alternative trading systems) and regulatory authorities, for implementing mechanisms to deal with the threat of extreme volatility. According to IOSCO, such volatility can “weaken market integrity and reduce investor confidence.”
The report examines the sorts of automated measures that trading venues have adopted, such as circuit breakers and trading halts, to address the risks that can accompany excessive volatility. It examines the process for establishing and monitoring the thresholds and reference prices used in these mechanisms; and, disclosure about the design, operation and triggering of these mechanisms to regulators, the industry and investors.
IOSCO’s paper also looks at communication between trading venues during episodes of extreme volatility, particularly for stocks and other assets that are traded in multiple jurisdictions. And, it proposes a set of recommendations for the implementation, operation and monitoring of volatility control mechanisms.
Comments on the paper are due by May 6.