IIROC issues notice on market circuit breakers

IIROC today issued a Notice providing guidance on market-wide circuit breakers in Canada, following the adoption of new rules on market-wide circuit breakers in the U.S., to take effect April 8, 2013.

Following the May 6, 2010 “Flash Crash”, IIROC undertook a number of identified initiatives and committed to review the current market-wide circuit breaker policy.

Read: Can a flash crash happen again?

In the U.S., the national securities exchanges and the Financial Industry Regulatory Authority recently received approvals for proposals to revise their existing market-wide circuit breakers. Approximately 60% of the value of securities traded on marketplaces in Canada is in securities which are inter-listed with markets in the U.S.

Having consulted with the industry on alternative approaches for Canada, IIROC has determined that Canada’s market-wide circuit breakers should continue to be harmonized with those in the U.S.

“This set of market controls is intended to help mitigate extraordinary short-term price volatility on a market-wide basis in order to maintain fair and orderly markets,” said Susan Wolburgh Jenah, IIROC president and chief executive officer.

Since their adoption in 1988, market-wide circuit breakers have been activated only once, in 1997, in Canada and the U.S.

Read: No single cause for ‘flash crash’: IIROC

Market-wide circuit breakers trigger a pause in trading of all stocks after decline of a predetermined size in a designated benchmark stock index.

Planned U.S. changes include using the S&P 500 Index rather than the Dow Jones Industrial Average as the benchmark index, reducing the daily decline thresholds for the triggers to 7% (from 10%), 13% (from 20%) and 20% (from 30%) and cutting the resulting trading pause to 15 minutes in all cases from 30, 60 and 120 minutes, respectively.

Canada’s benchmark index, the S&P/TSX Composite, is highly correlated with U.S. indexes. IIROC found the S&P 500 would have triggered a Level 1 (7%) circuit breaker on nine occasions since the start of 2008 if the proposed changes in the U.S. had been in place. Movement in the Canadian index would have tripped a Level 1 breaker five times during the same period.

Market-wide circuit breakers are an important volatility control. Other controls are applied at the individual stock level and range from order filtering and risk management obligations at the dealer level, to volatility controls by the marketplaces themselves and single-stock circuit breakers (SSCBs).

Read: U.S. seeks new rules to halt trading

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The staff of Advisor.ca have been covering news for financial advisors since 1998.