Mr. Timothy Ryan
Director, Market Regulation Policy
Investment Industry Regulatory Organization of Canada
Suite 900
145 King St. West
Toronto, Ontario
M5H 1J8
Dear Mr. Ryan:
Re: Proposed Guidance Respecting the Implementation of Single-Stock Circuit Breakers
CNSX Markets Inc. (“CNSX Markets”) thanks the Investment Industry Regulatory Organization of Canada (“IIROC”) for the opportunity
to comment on the proposals to institute a single-stock circuit breaker (“SSCB”). CNSX Markets, a recognized exchange, operates two
markets: the Canadian National Stock Exchange (“CNSX”), which provides listing, trading and market information services for 143 issues,
and Pure Trading, which provides a high capacity/low latency trading environment for 4,439 issues listed on the Toronto Stock Exchange
(“TSX”) and the TSX Venture Exchange (“TSX-V”). IIROC is the regulation service provider for both markets.
As the operator of two venues that employ the price-time continuous auction market model, CNSX Markets fundamentally believes that
investor and stakeholder confidence in the fair and orderly operation of the equity markets is best promoted by ensuring their continuous
operation. We are pleased that IIROC shares this view, and has acknowledged that the implementation of any SSCB has to be conditioned
with regard to this important policy.1
As described in the IIROC paper, “Proposed Guidance Respecting the Implementation of Single-Stock Circuit Breakers”, marketplaces in
Canada have instituted a number of measures designed to reduce the risk of unintended or inappropriate trade executions, while preserving
the continuous operation of their auction market services. In the case of CNSX Markets, there are two principal safeguards:

Freeze parameters: in the event that a particular listed issue has an incoming order that would cause a trade to occur that is
outside of a predetermined limit from the previous trade2, the book is frozen:
o No further transactions (new orders, CFO‟s, cancellations or trades) are permitted to take place until a CNSX Markets
Operations staff member has reviewed the pending trade against news or other fundamental events and the order book
on the market involved (including third party marketplaces, if applicable) and, if there appears to be no reason for the
sudden price change, contacts the trader entering the order to confirm that they intend to trade at the price.
o A freeze condition typically lasts less than 60 seconds, and, in most cases, results in the trade proceeding. This
mechanism minimizes the risks of transactions taking place, against the trader‟s intentions, at a significant difference
from the previous traded price3.
o The freeze parameters are typically triggered 5 to 10 times per day on CNSX and Pure Trading; they are an important
component in building investor confidence in the market services offered by the organization.

Limit order protection: all market orders submitted to Pure Trading and CNSX are converted by the trading system into limit
orders:
o
o
o
For stocks posted on Pure Trading, the limit price is equal to 50 ticks (up or down) from the first trade generated by
the order.
For CNSX, where issues are generally lower priced, the limit price is 25 ticks from the first trade.
The same “collars” are applied to limit orders submitted into the system as well.
1
See IIROC Notice 10-0298 “Proposed Guidance Respecting the Implementation of Single-Stock Circuit Breakers”, p. 12.
CNSX Markets has 6 tiers, with a different percentage-based parameter according to the price of the stock. The tiers are not publicly
disclosed to prevent possible gaming activity.
3
For the purposes of “last traded price”, CNSX Markets, consistent with its short sale rule enforcement, uses the most recent traded price
from Pure Trading, TSX, or TSX-V for Pure Trading-posted stocks and from CNSX for CNSX-listed stocks.
2
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o
Generally speaking, given the depth of the consolidated market for TSX and TSX-V-listed issues, and the use of
routers to meet order protection obligations, limit order protection is engaged relatively infrequently. For CNSXlisted issues, where the markets are comparatively less liquid, it is more common for the freeze parameter to engage
before the tick protection provision kicks in. Nonetheless, there are a number of instances over the course of the year
when the protection is engaged to prevent an unintended trading consequence from occurring.
In addition to these system-enforced investor protection measures, CNSX Markets also works with IIROC and the other marketplaces in
Canada to administer orderly trading “halts” under authority of the Universal Market Integrity Rules (“UMIR”). Under UMIR, a Market
Integrity Official may delay, halt or suspend trading in a particular security if appropriate to do so in the interests of a “fair and orderly
market”. These halts are instituted to permit the investigation of unusual trading activity or at the request of the company to permit the
orderly dissemination of material information. Finally, CNSX Markets can implement, along with other marketplaces in Canada, market
wide circuit breakers based on declines in the level of the Dow Jones Industrial Average.
In summary, there are already a number of measures implemented by CNSX Markets at the individual market and market-wide levels
which further the goal of providing fair and orderly markets in Canada. CNSX Markets, as will be illustrated by our comments provided in
response to the specific questions below, has three major concerns with the IIROC proposal:



An SSCB at the levels proposed by IIROC will, contrary to the guiding principles set out in the IIROC paper, interfere with
administration of the existing investor protection regime, and cause an undue disruption in the operation of the markets.
Historic data shows that the 10% level proposed for TSX-listed stocks and the 20% level proposed for CNSX and TSX-V listed
stocks will give rise to too many “false positives”. CNSX Markets submits that, if an SSCB is implemented, the threshold
should either be conditioned with reference to declines or increases in the broader market level, or increased to a higher level.
CNSX Markets, as a participant with a number of the other marketplaces in Canada, provided its comments to IIROC in this
regard in a letter dated July 22, 2010, appended to this comment letter as Exhibit A. CNSX Markets continues to have the
concerns expressed in the letter with the IIROC proposal under comment.
Reference to the SEC pilot project (which has been extended again, at the request of marketplaces in the US) ignores important
differences in the stocks covered: all listed stocks in Canada vs. the Russell 1000 in the US. The smallest stock by market
capitalization in the Russell 1000 (described by Russell as a „Large Cap Index‟) was $1.23 billion USD on May 31, 2010, the
date the index was last re-balanced. As of Friday‟s close, the stock with a comparable market capitalization in the S&P/TSX
Composite Index was ranked 175th out of 245 constituents.
We believe that the SEC specifically intended to limit the
application of the pilot programme to larger, more active stocks so as to limit disruption to regular trading; if Canada
implements SSCBs, the same considerations should apply. In addition, as IIROC has noted in its analysis of the May 6, 2010
“Flash Crash”, full depth of market order protection and the greater public market exposure of small agency orders in Canada,
appear to have reduced the effects on investors of the May 6 market decline on Canadian investors. Given the apparent flaws in
the US system (“fat finger” trade reports on alternative display facilities have halted trading on massively liquid stocks in the US
at least twice since the start of the pilot programme), we do not believe that Canada should be looking to US regulation for
guidance in this area.
Our responses to the questions posed by IIROC are as follows:
1.
What is the appropriate relationship between price limits, including marketplace volatility parameters, and single stock
circuit breakers?
In keeping with the principle that IIROC has expressed, that SSCBs should be triggered under exceptional circumstances only, we believe
that an SSCB, if implemented, should serve as a third line of protection, after the freeze parameters and the tick limit protection offered at
the marketplace level:



At the 10% level proposed by IIROC, the SSCB could trigger at a level prior or equal to the freeze parameter for all
TSX-listed stocks priced at $5 and above (which represent a significant percentage of the most liquid stocks in Canada).
A 10% level would also interfere with the administration of the tick protection for stocks valued at $5 or less on Pure
Trading, and $2.50 or less on CNSX.
Given the number of stocks trading at less than 10 cents a share on CNSX and TSX-V, and the relatively “thin” order
books on many of these issues, an SSCB at the 20% level will result in numerous trading halts over the course of an
average trading day.
The implementation of the proposed SSCB would present a significant disruption to the existing investor protection regime (at the market
level). We do not believe that any case has been made that the SSCB approach is inherently better than the existing protection, particularly
on the temporary basis proposed, that would warrant the expense associated with making changes to the existing regime. In fact, given the
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data presented by the marketplaces earlier this year, it is apparent that the 10% and 20% levels are too low and too arbitrary a measure to
provide an effective measure of protection for Canadian investors.
2.
Should all Canadian-listed securities be subject to single stock circuit breakers? Are there any securities or classes of
securities that should be exempted from the application of the single-stock circuit breaker programme?
Authorities in the United States, concerned about the arbitrary nature of the 10% threshold, and its effect on the trading of lower priced
stocks, limited the stocks covered under the pilot programme to Russell 1000 index constituents. In the event that Canada proceeds with
the implementation of a SSCB, CNSX Markets submits that, for the purposes of an interim programme, a much narrower group of stocks
be contemplated. As indicated previously, if market capitalization is used as the benchmark, only the top 175 stocks in the S&P/TSX
Composite Index would be large enough to be included in the US test. The only, very roughly, comparable group in Canada would consist
of either the S&P/TSX Composite Index members (245 members as of this morning), or options-eligible stocks.4 Limiting the application
of the SSCB to larger capitalization, more liquid stocks would restrict the possibility of negative unintended consequences. In addition to
the stocks themselves, if an SSBC were triggered in a particular stock, we submit that the normal principles applying to the halt of an
underlying security related to trading on the options and single stock futures (if applicable).
3.
What is the appropriate price movement to trigger a single stock circuit breaker? Is the proposed distinction between
“junior” and “senior” listings for the purpose of establishing different trigger thresholds appropriate?
As submitted above, in order to avoid interference with existing investor protection measures, if an SSCB is to be implemented, it must be
targeted at something less than the universe of publicly-listed companies, and the trigger has to be higher than the blanket 10% proposed
for TSX-listed stocks and 20% for CNSX and TSX-V listed stocks. We do not believe, by virtue of the difficulty of avoiding an undue
risk of unnecessary market halts, that it is appropriate to commence a programme covering CNSX and TSX-V stocks at all. According to
the data presented to IIROC in the July 22 letter, the 10% level will generate too many halts for the TSX-listed stock universe. At the 20%
level proposed by the marketplaces for TSX Composite index constituents, the SSCB appeared to provide an appropriate layer of
additional protection for investors, over and above the individual marketplace measures. The marketplaces did not have an opportunity to
perform an historical analysis on a compromise measure that would see the 10% threshold augmented by the decline (or rise) in the
S&P/TSX Composite Index. It is our sense that including a reference to the general market direction would reduce the number of false
positives, but only if the stocks covered by the proposal were the higher capitalization, more liquid issues, i.e. index constituents or
options-eligible issues.
4.
Is it appropriate to consider all executions that occur during the five-minute time frame for the purposes of calculating
price movements?
The only prices that should be taken into account are those that contribute to the “last sale” price. In other words, odd lot trades, special
terms trades, and calculated price trades (VWAP and basis trades) for example, should all be excluded from the calculation of any SSCB
trigger.
5.
Is it appropriate to consider bids and offers for the purpose of triggering a circuit breaker where a security has not traded
during the previous five-minute period?
Given that the purpose of the SSCB is to prevent trades from taking place, it would be curious indeed to halt a stock on the basis of the
order book status alone. No research has been done on the number of times a 10% or 20% SSCB would trigger under these circumstances;
it is our belief that, particularly in the less liquid, lower priced portion of the market, there is a tremendous risk of a frequent
implementation of the circuit breakers. Without further research we think that it would be terribly unwise to use the order book as a basis
for triggering the SSCB.
6.
Are there any other types of trade that should be excluded from the calculation of price movement?
If SSCBs are to be implemented, we submit that the general rule should be that trades contributing to the “last sale” price should be the
only trades used in the calculation of price movement. One exception would be for trades cancelled as a result of a “clearly erroneous”
4
“Options eligible” is defined in Canadian Derivatives Clearing Corporation Rule B-603 as:
a. the Stock is listed on a Canadian Exchange;
b. the Market Capitalization of the Stock is within the top quartile (25%) of Securities listed on all Canadian Exchanges as of the last
trading day of the previous quarter. The specific dollar threshold will be published by the CDCC;
c. the monthly North American Volume of the Stock is within the top quartile (25%) of Securities listed on all Canadian Exchanges as of
the last trading day of the previous quarter. The specific threshold will be published by the CDCC.
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policy at the marketplace level, or by IIROC. In the event that the trade was cancelled (or the price varied) within the 5-minute window,
the original trade price should not be included in the calculation of price movement.
7.
What is the appropriate duration of the trading halt or halts resulting from the triggering of a single-stock circuit
breaker?
If the stocks covered under the programme are limited to the more liquid names trading in Canada (by definition the composite index
constituents, or options-eligible stocks), then the 5 minute halt proposed is supported by current practice. If the broader universe of stocks
is included, we question whether a 5 minute halt is sufficient for stocks with a higher rate of retail or “high touch” participation.
8.
Are there any times, outside of the recommendation, when single-stock circuit breakers should not be active?
Notwithstanding our expressed concerns about the imposition of an SSCB, we believe that the time limits proposed by IIROC (if not the
threshold) address concerns around possible price volatility on the open and approaching market close.
9.
What is the appropriate treatment of trades which occur following the triggering of a single-stock circuit breaker and
prior to the invocation of a trading halt?
In the event that a SSCB is implemented, IIROC should use its standard principles for cancelling or varying the price of trades that take
place between the trigger and the invocation of a halt. The industry has been nearly unanimous, following the experience of May 6, 2010,
in voicing a strong preference for price variation as opposed to trade cancellation. We support this view.
10. Are there other circumstances, other than those set out in the recommendations, in which a single-stock circuit breaker
should not be invoked?
Other than restricting application of the SSCB around the 9:30 am and 4 pm times, another method of restricting application of the circuit
breaker is during a period of broad market decline or increase. This could be accomplished by including the percentage increase or decline
in the composite index to the applicable trigger level. In this way, price increases or declines which occur as a result of a broader market
move will not result in an inappropriate halt of trading. Arguably, it is at times of particular market volatility when it is most important to
permit trading to continue.
In addition to the commentary requested, we have one further concern. IIROC has proposed a two phase implementation of the SSCB: the
first phase will see the calculation of the threshold by IIROC and coordination of any halt with the marketplaces, the second phase
anticipates that the marketplaces will build and implement the technical capability of calculating and administering the “halts”. We are
strongly of the view that it is unreasonable to expect the marketplaces to implement any technical solution to the administration of SSCBs
until a review has been completed by the industry of the effects of whatever rule is put in place by IIROC. This is especially the case
where the proposed threshold will interfere with the operation of existing investor protection measures. Our view is that if IIROC persists
with the 10% and 20% thresholds proposed in the discussion paper, the number of unintended consequences to normal trading activity will
lead to significant changes in the nature and character of the final rule. The fact that the US continues to extend the SEC pilot programme,
and has limited its affected stocks to what we would consider relatively liquid, higher priced stocks, should give the Canadian securities
industry and IIROC pause in the implementation of the proposed rule. If an SSCB is to be implemented, we recommend that there be a
specific time limit imposed on the programme, followed by an analysis of the results by the marketplaces and regulatory community.
Given our concerns about the proposal, we believe that the time limit should be relatively short: 3 months should be sufficient time to
identify issues in the implementation and administration of the programme.
We again thank IIROC for the opportunity to comment on these proposals, and look forward to continuing the discussion to further
enhance investor protection and confidence in the fair and orderly operation of the public equity markets in Canada.
Yours truly,
Richard Carleton
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Exhibit “A”
July 22, 2010
Ms. Maureen Jensen
Senior Vice President, Surveillance & Compliance
Investment Industry Organization of Canada
Suite 1600, 121 King Street West, Toronto, Ontario, M5H 3T9
Dear Ms. Jensen,
Re: Marketplace proposal for Single Stock Circuit Breakers (SSCB)
This submission is being made on behalf of Alpha ATS LP, Chi‐X Canada ATS ltd, CNSX Markets Inc., Liquidnet Canada
Inc., OMEGA ATS, MATCH Now and the Toronto Stock Exchange (the Marketplaces). The Marketplaces have been
meeting to discuss the issues in order to provide some input to the regulators on responses to the events of May 6,
2010. In this submission we are setting forth a recommendation and our analysis of the issues. Unless otherwise noted,
the views represent a consensus of the group.
I.
1
Recommendation :
2
Scope: TSX Composite securities, Canadian index‐related ETFs , and single stock options (Eligible Securities)
Level and methodology: Eligible Securities will be halted on all marketplaces in the event that the stock
experiences a 20 percent change in price, measured from the last sale price five minutes ago
Duration of Halt: 5 minutes (or longer if IIROC deems it necessary to prolong the halt in interest of market
integrity)
Reopening procedure: The same procedures should be employed that are currently used today by Exchanges
and ATSs at the market open
Responsibility for determination and notification to all Marketplaces: IIROC
Responsibility for implementation of halts: Marketplaces will implement mechanisms to prevent further
3
1
2
trading
Additional details are set out in Part IV.
One marketplace was of the opinion that a SSCB program should be implemented in phases; each phase incorporating new classes of
securities (Phase 1 ‐ TSX Composite securities and single stock options, Phase 2 ‐ all ETF’s, Phase 3 ‐ all other securities). However this
marketplace believed that if ETF’s were selected to be part of the initial pilot program, all ETF’s should be included.
3
The mechanisms currently used for Regulatory Halts will be employed. Differences may exist between marketplaces.
4
All times are EDT.
5
Number of trades as reported by IRESS.
II.
Facts and Background
Facts
th
On May 6 , 2010, the U.S equity markets experienced a severe disruption. Most major market indexes saw an
4
unprecedented decline and rebound of prices in both speed and scope. During the period from 2:30 p.m. to 3:00 p.m.
the Dow Jones Industrial Average suffered its biggest intraday point decline in history, dropping 998 points or close to
10 percent. This move was soon followed by a rebound of over 1,010 points as prices returned to pre‐decline levels.
During this same period, prices of a large number of individual securities declined at greater rates than the index. The
severe price volatility led to a large number of trades being executed at temporarily depressed prices, including many
that were more than 60% away from pre‐trade decline prices and were broken by Self Regulatory Organizations.
Although prices were impacted in Canada by the trading activity in the Unites States, volatility levels were far less
extreme. Whereas the DJIA fell nearly 9%, the value of the S&P/TSX Composite fell only 3.8%. In addition, the number
of single securities that traded at depressed levels was only a fraction of the number of those traded in the United
States. Using the more conservative standard of 20% in their determination of clearly erroneous trades, the Investment
Industry Organization of Canada (IIROC) cancelled trades in only four securities. The total number of trades cancelled
was only 223 trades of a total of 2.47 million trades on that day.
U.S. Policy Initiatives
5
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The events of May 6 have led to new policy initiatives in the United States intended to prevent the recurrence of
th
similar circumstances in the future. On June 10 2010, the Securities and Exchange Commission (SEC) approved new
rules to require a trading pause in certain individual securities if the price moves 10% or more in a five‐minute period.
th
On June 30 , the SEC published for comment proposals to extend this pilot program to include all Russell 1000 Index
components and certain exchange‐traded funds (ETF’s).
III.
Policy Considerations and Analysis
Policy Considerations
Although there may be value in this new initiative, given the complexity of today’s market structure we believe it is
important that the design and implementation of any new policy should by driven by quantitative analysis and, where
possible, a full understanding behind the circumstances that implementation is intended to prevent. Implementing
changes of any kind can have broad impact, certain unintended consequences, and encounter unforeseen problems.
th
An example of one such problem associated with the implementation of the SEC’s pilot program occurred on June 29
when an erroneous OTC trade in Citigroup triggered the SSCB on the security and brought trading to a halt for a five
minute period.
As operators of marketplace facilities, we believe that confidence in the fair and orderly operation of markets is best
promoted for all participants by ensuring their continuous operation. To promote the continuous operation of markets,
marketplace operators in Canada have layered safeguards intended to protect investors from unusual price
movements. These measures include freeze parameters intended to prevent trades from occurring at levels too far
removed from the previous traded price (unless there is a fundamental reason for the price move), tick protection for
market and limit orders, and price validation checks designed to prevent “fat finger” orders from entering the system.
Not withstanding this layer of protection, for questionable trades that do take place, some markets have “clearly
erroneous” trade policies that permit cancellation or revision of the trade; other markets refer clients to IIROC to
amend or cancel trades that take place outside certain parameters. Finally, in the event of a significant price break, the
industry has agreed on market‐wide circuit breakers designed to permit participants to adjust their orders in response
to a major decline in the levels of the US Dow Jones average.
Given the current layers of protection in place, we believe that the implementation of a single stock circuit breaker
should be arranged so that it happens in only the most exceptional circumstances. Also, we believe that the
determination of the specific level used to trigger a SSCB should be driven by hard data and not simply speculation.
Single Stock Circuit Breaker Evaluation for the Canadian Marketplace
ITG conducted a retroactive study looking at the number of instances where single stock circuit breakers would have
been triggered using threshold levels of 10, 20 and 30 percent during two periods of market volatility: the second half
of 2008 (a period of significant volatility) and the first half of 2010 (a period with substantially lower overall volatility).
Implementation of SSCB was done using a rolling 5‐minute window of trades. Each new trade was compared to the
oldest trade within the 5‐minute window. This method reduced trading halts due to transient price movements that
lasted for less than 5‐minutes. When a price movement limit was encountered, a 5‐minute trade halt was simulated.
The findings of ITG’s study reveal that the price movement limit should lie somewhere between 20 and 30 percent.
Results showed that if a 10 percent threshold was used (similar to that implemented in the SEC’s pilot program), there
would have been 432 and 23 trade halts for the second half of 2008 and the first half of 2010 respectively. With a 30
percent price movement limit, there would have been 14 and 2 halts for these same time periods. Furthermore, the
study showed that the number of trade halts was correlated with market volatility, with the majority of halts
concentrated on a handful of trading days. As the threshold level of SSCB’s is meant to capture only the most
exceptional circumstances that raise market integrity concerns, using a threshold between 20 and 30 percent is most
appropriate.
Guiding Principles for the Marketplace proposal for SSCB’s
We believe that the following guiding principles should form the basis of a new policy initiative where Single Stock
Circuit Breakers are implemented:
Single stock circuit breakers should be implemented as to prevent extreme cases that would suggest a lack of market
integrity. They should capture instances where a real problem has occurred with minimal interference of normal
trading conditions. If circuit breakers are set off too frequently a message may be communicated that the Canadian
market is either too volatile or worse unreliable.
As one of the fundamental roles of capital markets is the timely and accurate discovery of securities prices, we believe
that all things considered, it is better for a market to be open for trading than closed.
Implementation of SSCB’s should be simple in order to be practical. A methodology that is easy will better assure
understanding by market participants and in turn will support investor confidence. Consideration should be given to
the costs of implementation versus the gains of increasing complexity.
Policy decisions that influence market structure can lead to unintended consequences. The implementation of SSCB’s
should be done through a pilot program where regulators can maintain the flexibility to propose any modifications that
may be necessary or appropriate before the pilot period has ended.
Circumstances permitting, any new directive or policy decision should be based on an understanding behind the
circumstances that implementation is intended to prevent, and where possible, be based on data analysis of these
circumstances to better identify their cause.
Differences exist in market structures across jurisdictions. As a result, independent consideration should be given to
each jurisdiction when assessing the appropriateness of implementing any new policy directive.
6
Alpha ATS LP would like to confirm that it believes that having common price band parameters that prevent “bad trades” but continue
to allow orders and trades that do not violate the price band parameter is preferable to a circuit breaker that stops trading completely. It
has joined in this proposal because it recognized the difficulty in achieving agreement on this approach rather than the circuit breaker
approach; and does agree that trades at prices that are at an extreme variance from the real price should not happen.
IV.
Marketplace Proposal
6
Scope, Level and Methodology
The marketplaces recommend to the CSA and IIROC that a pilot program should be undertaken whereby trading in any
constituent stock of the S&P/TSX Composite Index and all Canadian index‐related ETF’s will be halted for a 5 minute
period on all marketplaces in the event that an Eligible Security experiences a 20 percent change in price, measured
from the last sale price five minutes ago. The 20 percent trigger level was selected based on the findings of ITG’s study.
Using a 10 percent trigger level would result in an excessive amount of hits occurring on a regular basis in a moderately
volatile environment. Using a 30 percent trigger level, although limiting the number of hits to those circumstances
where market integrity may be called into question, proved too restrictive as triggers would have been set off on only 2
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of the 4 symbols where trades were cancelled on May 6 . Although there were different views held by the
Marketplaces as to whether the right level should be 20, 25, or 30 percent, the Marketplaces agreed to compromise on
20 percent. The difference in methodology for calculation from the model used by the SEC was driven by its simplicity
and to facilitate lower cost and easier implementation.
In order to avoid interfering with existing procedures designed to facilitate orderly openings and closings, the rules for
SSCB’s should be effective between 9:50 and 3:40 using last sale prices from 9:45 to 3:35. The commencement of the
five minute trading pause should be determined by IIROC as the “effective halt time” and defined as the time when the
first marketplace halts trading. If, after this period, IIROC makes the determination that circumstances warrant
extending the period, they should be free to do so. At the end of a security’s halt period (either the five minute period
or the extended period determined by IIROC), normal resumption of trading mechanisms should be used.
In addition to Eligible Securities, we recommend that when any constituent stock of the S&P/TSX Composite Index is
halted for trading, its corresponding option classes should also be halted.
Implementation
Single securities
As the purpose for implementing SSCB’s is to preserve market integrity through the maintenance of fair and orderly
markets, we believe that SSCB’s should be defined as regulatory halts and that the responsibility for both the
identification and notification of the halt should rest with IIROC. Identification can be accomplished using IIROC’s new
surveillance system – STEP which can be programmed to generate an alert message when the last sale of an Eligible
Security trades above or below 20% of the last sale price 5 minutes earlier. When a trigger occurs, notification can be
made using IIROC’s current procedures for regulatory halts. TSX, CNSX, and Alpha ATS will be notified by either phone
or email. Notification to other Canadian marketplaces can be made electronically by means of a ‘halt’ message
communicated through the TSX data feeds consistent with current practice. Using this existing technological solution
allows for the simultaneous halting of trading on marketplaces that consume TSX data once the message is sent and
can be used to communicate both the effective halt time as well as the time when trading should be resumed.
In order to ensure the fast implementation of the proposal, the current process for implementing regulatory halts will
be relied on which involves a manual process (initial communication to TSX, Alpha and Pure). Due to the absence of a
fully electronic solution certain marketplaces will be open for trading while others are closed after notification has
been made. To ensure fairness to all market participants, we recommend that IIROC consider issuing guidance that all
trades which occur outside the 20% level will be cancelled. In addition we recommend that IIROC mandate a required
time for all marketplaces to implement a halt. We believe that cancelling trades beyond the 20% level represents that
fairest solution for the following reasons:
It prevents gaming between marketplaces and provides for quality of trading across venues.
The 20% threshold level is twice the size of the threshold being used by the SEC in its single stock circuit breaker pilot
program. This threshold has been intentionally set at a level which will trigger only in the most extreme circumstances
where market integrity concerns are raised. Trades that occur outside the 20% level will occur at prices that may not be
considered rational and the legitimate intention to trade by participants at these prices may be called into question.
All participants will be placed at the same advantage/disadvantage irrespective of which marketplace they may post or
execute their orders.
Any confusion about trade cancellation will be pre‐empted by clear communication made by IIROC to market
participants regarding the calculation methodology of thresholds. In addition, given today’s automated trading
environment, trading models can be easily programmed to cease trading at the pre‐defined level.
7
See Appendix A for Marketplace ad hoc Committee members.
While this solution may be appropriate during a pilot period, the preferred solution is an automated solution where
IIROC sends out a message that is read by all of the marketplaces at the same time and responses are implemented
simultaneously so that no trades must be cancelled and all marketplaces are placed on equal footing.
Single stock option class
The Montreal Exchange (MX) is supportive of halting all single stock options when the associated equity is halted. After
a SSCB has been triggered on an underlying security, the current process in place for halting option classes when
existing circuit breakers are triggered should be used. After notification has been made to the MX by IIROC, the option
class will be placed into pre‐open. The class will be released on a five minute delay after the underlying security is open
to allow market makers to adjust their quotes and provide a fair and orderly resumption of trading.
We recommend that the pilot program be conducted for a period of sixth months. The pilot period will enable both
IIROC and the CSA to assess the effect of the new rules on the market which can then be considered when making any
decision to implement permanent rules going forward. We also recommend that during this six month period, IIROC
take advantage that as this is a pilot program changes can be made in response to any necessary or desired effects of
implementation.
The marketplaces thank you for your consideration and welcome the opportunity to answer any questions you may
have about this proposal at your request.
Respectfully,
The Marketplace ad hoc Committee
7
Appendix A – Members of the Marketplace ad hoc Committee
Matthew Thompson – Chi‐X Canada ATS Limited
Dan Kessous – Chi‐X Canada ATS Limited
Randee Pavolow – Alpha ATS LP
Lloyd Clarke – Alpha ATS LP
Richard Carleton – CNSX Markets Inc.
Cindy Petlock – CNSX Markets Inc.
Kevin Sampson – Toronto Stock Exchange
Deanna Dobrowsky – Toronto Stock Exchange
Greg King – OMEGA ATS
Torstein Braaten – MatchNow
Heather Killian ‐ MatchNow
Robert Young – Liquidnet Canada Inc.
Jacques Tanguay – Montreal Exchange
Brian Gelfand – Montreal Exchange