Canadian stock markets to adopt U.S.-style changes to 'circuit breakers'

TORONTO – Canadian stock markets plan to adopt new rules that determine when “circuit breakers” kick in to halt local trading when there are unusually large drops in the value of the S&P 500 in New York.

The changes will harmonize the standards being adopted south of the border on April 8.

The announcement was made Thursday by the Investment Industry Regulatory Organization of Canada, a national body that helps oversee the country’s securities markets.

“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 IIROC president and CEO Susan Wolburgh Jenah.

About 60 per cent 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.,” the regulators said.

The new rules would reduce thresholds set for daily declines to seven per cent before a trigger is enacted. The standard for a Level 1 halt has been lowered from a decline of 10 per cent.

A Level 2 halt has been reduced to a 13 per cent drop from 20 per cent. Level 3 will be 20 per cent from 30 per cent.

A Level 1 or 2 halt that is triggered before 3:25 p.m. ET will result in a trading pause of 15 minutes. After that time, trading will continue until the close of markets at 4 p.m.

A Level 3 halt at any time of day will result in trading not resuming for the remainder of the trading day.

On days when the U.S. markets aren’t opened for trading but Canadian markets are, for example the Fourth of July holiday, the halt criteria will be applied to drops in the S&P/TSX Composite Index.

IIROC announced a review of the current market-wide circuit break policy following the so-called Flash Crash of May 6, 2010, when a software trading glitch in the United States sent stocks plummeting.

In the U.S., the national securities exchanges and the Financial Industry Regulatory Authority recently received approvals to revise their existing market-wide circuit breakers.

Planned U.S. changes include using the S&P 500 Index rather than the Dow Jones Industrial Average as the benchmark index.

Market-wide circuit breakers are one means of 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.

Market-wide circuit breakers were first brought in 25 years ago but under current thresholds have only been activated once, in 1997.

Canadian regulators estimate that the circuit breakers would have been triggered about five times in Canada since 2008 if the new standards had been in place.

IIROC is the national self-regulatory organization which oversees all investment dealers and trading activity on debt and equity marketplaces in Canada.