The stomach-churning drop on the Toronto Stock Exchange Monday morning triggered a rare flurry of circuit breakers that cut trading in individual stocks.
The Single Stock Circuit Breaker system, first put in place in 2012, allows regulators to stop trading in an individual security that moves wildly, unlike broader circuit breakers, which halt trading in the entire market when there is extremely volatile trading.
Just after trading started Monday morning, WestJet Airlines Ltd. saw its trading stopped, as did Linamar Corp. and Calfrac Well Services Ltd.
Later in the morning, Tamarack Valley Energy Ltd. and Hudson's Bay Co. also triggered the circuit breakers and were briefly halted.
One exchange-traded fund, First Asset Morningstar Canada Momentum Index ETF, also saw its trading stopped briefly.
These circuit breakers can be tripped on any stock that is in the S&P/TSX Composite index, along with some other actively traded stocks and ETFs that mainly hold listed stocks.
This is the highest number of circuit breakers triggered on a single day since the system was put in place three years ago, according to the Investment Industry Regulatory Organization of Canada (IIROC). In the past, there have never been more than six triggered in an entire quarter.
This is how the circuit breakers work: If there is a price jump or fall of 10 per cent in a five-minute period, the stock is halted for five minutes. That can be extended another five minutes. This rule applies only from 9:50 a.m. to 3:30 p.m. – in other words, not at the start of trading or just before the close.
However, in the first 20 minutes of daily trading and the last half-hour, a 20-per-cent change in price will trigger the single-stock halt.
Under the circuit-breaker rules, any trade that happens more than 5 per cent beyond the trigger price will be cancelled.
While circuit breakers for broader markets have been in place for many years, regulators across North America only started considering individual stock circuit breakers after the "flash crash" of May 6, 2010. On that day, stocks plunged by hundreds of points in minutes, then eventually recovered. It was discovered that uncontrolled price declines in a handful of securities triggered the broader sell-off.
When IIROC put controls in place in 2012, they applied only to companies listed on the S&P/TSX Composite and to ETFs, and not for early and late trades. In February, 2015, changes were made to cover those periods, and to extend the rules to include other actively traded stocks.
The underlying idea, IIROC said, is to dampen extreme volatility in specific stocks, and thus to trim index volatility.
Robert Young, chief executive officer at institutional trading network Liquidnet Canada, said single-stock circuit breakers can help to rein in problems caused by poorly constructed trading orders – such as stop losses (which trigger a sale when a stock falls) that don't have limits. Essentially "circuit breakers prevent contagion," he said. "Markets are electronic, but they react with emotion, and they often overreact."
The securities that fall under the circuit-breaker rules represent about 9 per cent of all listed securities, but about 88 per cent of all trades, according to IIROC figures released last year.
There are similar rules in the United States. One of Canada's most widely held companies – BCE Inc. – was halted briefly on the New York Stock Exchange Monday morning when there was a period of very volatile trading in the stock.