Canada proposes single-stock circuit breakers

Canadian regulator the Investment Industry Regulatory Organization has set out a proposal for single-stock circuit breakers similar to those currently being used in the US and other countries.
By None

Canadian regulator the Investment Industry Regulatory Organization (IIROC) has set out a proposal for single-stock circuit breakers similar to those currently being used in the US and other countries.

Under IIROC's proposal single-stock circuit breakers would apply to all securities listed on any exchange in Canada, including those dual listed in Canada and the US.

When a stock price increases or decreases past a certain threshold, the circuit breaker would trigger a trading halt for five minutes for Toronto Stock Exchange (TSX) listed-shares which could be extended in the case of an imbalance. For stocks listed on the small-cap exchanges, TSX-Venture or CNSX, the halt will be for 10 minutes to account for the comparatively lower levels of liquidity.

Circuit breakers were introduced in the US following the ā€¯flash crash' of 6 May, when a number of US and Canadian stocks saw rapid falls and recoveries within a 20-minute period. The cause of the crash was determined by the US regulator the Securities and Exchange Commission to be a trade carried out by a buy-side firm that used a participation algorithm with volume as its only parameter, which led it to sell a large number of E-Mini S&P 500 contracts in a short space of time.

The Canadian Securities Administrators and IIROC said that they had begun an analysis of the events surrounding the crash at the time, along with a review of its circuit breaker policy.

Under the Universal Market Integrity Rules IIROC has the authority to delay, halt or suspend trading at any time where it is considered appropriate and in the interest of a fair and orderly market, whether across the market or in particular securities. This manual process has been deemed as inadequate to deal with halting trading across multiple securities in multiple marketplaces in a short space of time.

Trading in TSX securities would be halted if the price moves by 10% or 10 trading increments – whichever is greater in a five-minute period.

TSX-Venture or CNSX securities would be halted if the price moves by 20% or by 20 trading increments, whichever is greater, in a 10 minute period. These would operate between 09.50 and 15.40 Eastern Time. The proposal has a three-stage process consisting of a consultation and development phase, implementation period and review/evaluation and will initially be open for public comment until 16 January 2011.

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