Canadian Regulators Investigate Unusual Trading During Market Plunge

Strategic Insights -

Canadian regulators have launched an investigation into the unusual trading that occurred during the market plunge of May 6, aimed at addressing the inconsistent rules for freezing trading on stock exchanges during periods of wild volatility. The investigation is a response to the wild volatility in some stocks, which caused the Dow Jones industrial average to plummet 600 points in five minutes. Regulators are looking closely at the risks involved in electronic trading as markets become increasingly complex and fast-paced. A major reform is proposed, which will standardize the volatility triggers that cause trading to be frozen on stock exchanges and alternative trading systems.

Key Takeaways:

  • The Canadian Securities Administrators (CSA) has joined forces with the Investment Industry Regulatory Organization of Canada (IIROC) to review rules for halting trading during market swings.
  • The investigation aims to address the inconsistent rules for freezing trading on stock exchanges during periods of wild volatility.
  • The proposal for reform includes standardizing the volatility triggers that cause trading to be frozen on stock exchanges and alternative trading systems.
  • Exchanges and alternative trading systems (ATSs) have different volatility parameters, which critics say exacerbated the fall in prices on May 6.
  • IIROC has cancelled 12 trades and repriced 218 others across four stocks.
  • Connie Craddock, a spokeswoman for IIROC, stated that they are addressing the specific issue of inconsistent volatility parameters.
  • CSA chairman Jean St-Gelais stated that regulators are looking closely at the risks involved in electronic trading as markets become increasingly complex and fast-paced.

Statistics:

  • 600 points: the Dow Jones industrial average plummeted in five minutes during the market plunge of May 6.
  • 12 trades: cancelled by IIROC across four stocks.
  • 218 trades: repriced by IIROC across four stocks.
  • 4 stocks: affected by the trading anomalies.

Sources:

  • Henri-Paul Rousseau, "Canada's regulators trying to explain why tumultuous trading continued," The Globe and Mail, May 7, 2009.
  • James Rajotte, "CSA, IIROC investigate unusual trading on May 6," Reuters, May 8, 2009.