On May 6, 2010, Canadian marketplaces experienced very unusual
levels of market volatility — a "Flash Crash."
Some securities dropped more than 20 per cent from their previous
day's closing price, with most of the decline occurring in a
15-minute window. Some stocks fell more than 10 per cent in less
than one second, and recovered just as quickly. Less dramatic price
declines in individual securities continue to occur regularly.
This increased market volatility is associated with an increase
in the ratio of orders to trades and with high-frequency electronic
trading driven by computerized trading algorithms. These traders
have direct high-speed access to multiple marketplaces. As the
activities of some of these direct access traders can be
disruptive, securities regulators are proposing comprehensive rules
to increase supervision of these trading practices and to curb or
prohibit them when they interfere with orderly markets.
During the Flash Crash, dropping market prices caused
direct-access and other clients to enter stop-loss orders (orders
to sell immediately at market price). At the same time, because of
the extreme volatility, previously entered buy orders of
high-frequency traders were cancelled. These orders normally
moderate the impact of price decreases. The sudden disappearance of
buying interest at prices near the market bid worsened volatility
and ultimately resulted in severe downward price pressure. It also
caused trades to occur at drastically lower prices than those that
prevailed at the time of order entry.
Recent guidance has been issued to Investment
Industry Regulatory Organization of Canada (IIROC) members that
execute orders as market participants on stock exchanges and
alternative trading systems. In summary, IIROC has stressed the
In volatile markets, participants are encouraged to recommend
limit prices on all stop-loss orders. A limit order (an order to
buy or sell a stock at a specific price or better) provides control
over execution price, but may not execute in a fast-moving
For execution-only accounts, where no advice is provided to the
client, participants should still take reasonable steps to warn
users on the order-entry screen when a client enters an order with
a higher risk of unintended execution outcomes, such as a stop-loss
order with no limit.
Where multiple marketplaces are open for trading at the same
time, it is expected that the participant will choose the optimal
marketplace based on its regular monitoring of the different
marketplaces for the quality of executions obtained for opening
orders and the opening liquidity of particular securities.
Participants may choose to mitigate the risk by using order-routing
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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