Single-Stock Circuit Breakers: Expanding a Canadian Risk-Management Tool
By Deanna Dobrowsky, Vice-President Market Regulation Policy at IIROC
IIROC issued Final Guidance on July 10, 2014 to expand the single-stock circuit breaker (SSCB) program in Canada which has been in place since February 2012. The SSCB program targets rapid, significant and unexplained price movements and covers securities in the S&P/TSX Composite Index, as well as exchange-traded funds that are comprised principally of Canadian-listed securities. In IIROC’s view, applying SSCBs to securities in a broad-based index reduces extreme volatility in those securities and, by extension,
dampens the volatility in the index. Under the expansion, SSCBs will also cover securities that are considered to be “actively traded”.
An SSCB triggers when a security experiences a significant and unexplained price movement (generally measured as a price increase or decline of at least 10% and 20 trading increments) during a five-minute period, and results in a five-minute trading halt.
The securities that are covered by SSCBs account for a significant portion of total Canadian marketplace activity in terms of volume and value traded. Based on data from February 2013, under the expansion the SSCB program would cover securities that represent approximately 92% of the total value traded on Canadian equity marketplaces.
The SSCB Guidance, which takes effect February 2, 2015, expands the list of securities covered by SSCBs to include all securities that are considered “actively traded” and extends the times when they are active – SSCBs are now active from 9:30 a.m. to 3:30 p.m.
SSCBs are part of a series of IIROC reforms implemented to control risks arising from electronic trading. These measures include:
• requirements for participant controls to prevent the entry of orders that exceed certain thresholds and to address client order flow that is not intermediated by the participant, introduced through the electronic trading rules (March 2013) and third-party marketplace access rules (March 2014);
• a proposal for the introduction of marketplace thresholds (published for comment in April 2014);
• IIROC’s February 2013 update to market-wide circuit breakers to align with changes in the U.S.; and
• IIROC’s August 2012 clarification of its policies and procedures on erroneous and unreasonable trades.