Canadian investment industry body revises determination of actively-traded securities

The Investment Industry Regulatory Organization of Canada (IIROC) today issued additional guidance with respect to securities covered by Single-Stock Circuit Breakers (SSCBs). The guidance explains changes in determining an actively-traded security.

All actively-traded securities are subject to the single-stock circuit breaker (SSCB) program.

The method to determine an actively-traded security differs from the Previous Guidance in that:

• the calculation of average trade volume of at least 500 times per trading day uses a weighted average rather than a simple average;
• the calculation of average trading value of at least $ 1,200,000 per trading day uses a weighted average rather than a simple average;
• the data for the first five trading days for new listings is excluded from the above weighted average volume and value calculations.

IIROC believes that SSCBs should not be applied too widely and inadvertently capture price movements that may be representative of the normal trading patterns of a particular security, such as those securities which are less liquid, lower value and historically demonstrate higher short-term volatility. The body conducted an analysis on the application of the SSCB program and looked at how to better ensure that SSCBs are being applied appropriately.

As a result of this analysis, IIROC has made the above-mentioned changes to the determination of an actively-traded security to improve how SSCBs are applied.

Regarding the use of weighted average, IIROC explains that its analysis indicated that using an exponentially weighted average with a half-life factor to determine an actively-traded security places more importance on the security’s recent trading activity, and improves the responsiveness of SSCB selection criteria by adding an actively-traded security to the SSCB program or removing an inactive security from the SSCB program in a more timely manner. Securities that have a recent increase in liquidity will be added to the SSCB program sooner and securities that had significant liquidity in the past but where that liquidity has since reduced and become inactive will be removed from the SSCB program sooner under this new calculation methodology.

With respect to newly listed securities, the new method will exclude the volume and value trading data of the first five trading days from the weighted average calculation of volume and value. This approach avoids incorporating excessive trading volumes sometimes found in the initial trading phase of new listings into the determination of an actively-traded security. IIROC believes that this method results in a better representation of the “normal” trading activity of new listings.

The changes to the determination of an actively-traded security come into effect on January 27, 2020.