Securities regulators are considering the adoption of volatility controls for Canadian marketplaces.
The Investment Industry Regulatory Organization of Canada (IIROC) is requesting comment on possible approaches for establishing and operating price and volume thresholds, or volatility controls, for marketplaces. The regulator says that this initial consultation is the first step in a process that may lead to it making a formal proposal to establish price and volume thresholds to be employed by marketplaces.
IIROC says that the measures would complement initiatives undertaken, or proposed, by IIROC for controlling short term, unexplained price volatility — such as the introduction of single-stock circuit breakers — which are designed to prevent the sort of market action that led to the so-called ‘flash crash’ in May 2010. Marketplace thresholds would represent another line of defence.
In its paper, IIROC suggests two guiding principles for the development of these sorts of controls. That marketplace thresholds “should operate to generally preclude the execution of orders at prices that would otherwise, on execution, require regulatory intervention…”; and, that the volatility control mechanism used by a marketplace “should have the least amount of impact on the market-wide operation of the price discovery mechanism and access to ‘tradable’ liquidity.”
Comments are due by August 8. After considering the comments received, among other things, IIROC plans to issue for public comment a formal proposal on marketplace volatility controls.