The Investment Industry Regulatory Organization of Canada said Thursday that Canada’s market-wide trading halts – called circuit breakers for their ability to stop volatile markets for a specified period of time – should be harmonized with new U.S. guidelines.Frank Gunn/The Canadian Press
Canada's stock market regulator will not introduce new national rules that shut down trading during times of unusual stock market swings, instead deciding to align with U.S. guidelines.
The Investment Industry Regulatory Organization of Canada said Thursday that Canada's market-wide trading halts – called circuit breakers for their ability to stop volatile markets for a specified period of time – should be harmonized with new U.S. guidelines. The percentage market decline that triggers a halt is also being lowered so that it's easier to trip the system.
Last year, IIROC began to consider the new U.S. market-wide guidelines set to take effect April 8. It questioned whether Canada needed its own standards, or a hybrid solution. But after considering alternative approaches, IIROC has decided to adopt U.S. guidelines, noting that 60 per cent of the value of Canadian securities are inter-listed south of the border.
Regulators in the U.S. and Canada introduced circuit breakers to trading systems in 1988 in a response to the stock market crash dubbed Black Monday, and so far the switch has only been tripped once.
But IIROC decided to review and revise these policies after a flash crash in 2010 that saw the Dow Jones Industrial Average drop almost 1,000 points – although the market recovered much of that ground by the end of the day.
The individual stock circuit breaker was one of the more recently instituted safeguards. In February last year, the rules changed so that stocks in the S&P/TSX Composite Index that moved up or down more than 10 per cent in five minutes would be halted for a five-minute period. Exchange traded funds were subject to the same rule.
The market-wide halts are triggered in a similar way – they pause the trading activity on all stocks after decline of a predetermined size in a designated benchmark stock index.
So what are the U.S. guidelines? First, the S&P 500 Index will replace the Dow as the benchmark index because regulators believe it to be a broader index that would better represent a decline across the marketplace. The daily decline thresholds are also being tightened so that a 7 per cent drop triggers an initial, 15-minute halt, rather than activating it at 10 per cent.
A second 15-minute halt will happen after a 13 per cent drop. If a third halt is triggered after a 20 per cent drop, "trading shall halt and not resume for the remainder of the trading day," according to IIROC documents.
That could cause issues with index rebalancing and derivatives, IIROC notes, so a market integrity official reserves the right to use their judgment on the closure.
The S&P/TSX index will act as a substitute for the U.S. index on American holidays or other market closures.