In the wake of trading events that have required regulators to step in and unwind some unreasonable executions, the Investment Industry Regulatory Organization of Canada (IIROC) Friday proposed updated guidance on the use of stop loss orders.

IIROC has already issued guidance on managing orders in the context of best execution obligations, which included guidance on stop loss orders specifically. However, it notes that, since issuing the previous guidance, it “continues to note a number of specific circumstances, including orders from ‘discount brokerage’ accounts, in which trades resulting from the execution of stop loss orders have required regulatory intervention by IIROC.”

For example, back in February, IIROC said it was investigating trading in Orbite Aluminae Inc. that caused the stock’s price to plunge (dropping 55% in less than a second)) and the regulators to intervene. The regulator ordered that certain trades be revised after finding that the stock had traded at an unreasonable price, “due in large part to the automatic triggering of a number of stop loss orders by persons with long positions in the stock.”

Now, IIROC is issuing new guidance that aims to expand on its existing guidance, and also takes account of recent rule amendments regarding electronic trading, which became effective March 1 (requiring increased supervision of electronic access). IIROC says that the proposed guidance is expected to help firms “in managing the entry and execution of stop loss orders and to reduce the disruption to fair and orderly markets.”

IIROC notes that it is not prohibiting the use of stop loss orders that, when triggered, become a ‘market order’; however, it says this is under consideration. “IIROC intends to continue monitoring the impact of stop loss orders on fair and orderly markets and will assess whether additional regulatory steps are required,” it adds.

It notes that it believes that all stop loss orders without a reasonable limit price are “inherently risky in fast moving markets”, and it encourages firms to require limit prices on all stop loss orders. This recommendation is particularly applicable to firms that have automated the handling of stop loss orders, it says.

Firms that are continuing to allow the use of market stop loss orders, should limit their use to securities that are typically very liquid, with low historic price volatility; and, they should have a trigger price that is near the prevailing market price, at a volume that is not appreciably greater than the average trade size for the particular security.

Comments on the proposed guidance are due by May 27.