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A prominent regulatory organization is calling for stock markets to implement circuit breakers to head off a repeat of the “flash crash” that rocked stock markets in May.
The Investment Industry Regulatory Organization of Canada (IIROC) is soliciting public comment on a proposal it put forward Thursday for Canadian exchanges to consider implementing circuit breakers on individual stocks that halt trading in those shares if they suddenly rise or fall dramatically over short time periods.
The move is in reaction to the so-called “flash crash” on May 6 where North American equity markets lost billions of dollars in a matter of minutes that afternoon, seemingly without cause.
In the aftermath, everything from panic selling to some sort of technical glitch has been blamed. U.S. investigators probing the crash have yet to come up with a definitive cause for how and why, exactly, the Dow Jones Industrial Average lost more than 600 points in only 12 minutes.
Despite rumours of nefarious rogue traders or some sort of cataclysmic human error, a simple influx of sell orders and the snowball effect of thousands of stop-loss orders being triggered as prices declined appear to have caused the contagion on the Canadian side, a previous IIROC report on the crash found.
The IIROC proposal calls for a kill switch to halt all trading for 10 minutes in TSX-listed companies that lose or gain more than 10 per cent of their value within five minutes.
Smaller, less liquid shares that trade on the TSX Venture exchange or the Canadian National Stock Exchange would be subject to trading halts after a 20 per cent swing over 10 minutes.
The IIROC proposal for Canada is very similar to a system the U.S. Securities and Exchange Commission implemented in June covering individual stocks.
Worse in U.S.
“There are a huge number of names that are inter-listed [in Canada and the U.S.],” said Alison Crosthwait, the Toronto-based director of global trading strategy at Instinet Inc. in New York.
“When a stock is paused in the U.S. and not in Canada or vice versa, it could cause all kinds of dislocations and be confusing. Where it makes sense to co-ordinate regulations, so much the better,” she told Bloomberg.
The flash crash carnage was worse in the United States — trading in U.S. accounting consultancy Accenture Inc. shares that day went from more than $40 US to one cent, briefly, before rebounding just as suddenly and inexplicably.
Contrary to popular belief, the vast majority of stock trading is now done electronically and major world bourses already have circuit breakers that halt trading when the entire index moves suddenly lower or higher. The IIROC proposal would essentially extend that to individual stocks that have the potential of toppling the overall market.
Regulators already have the power to halt trading on individual stocks when circumstances warrant it, but the current system runs into problems when multiple halts need to be implemented quickly and simultaneously, which is where automating the process could help.
“This is part of a broad review of trading in Canada,” Crosthwait was quoted as saying.
The report is open for public comment for the next 60 days.
CBC News
