IIROC Issues Final Guidance on Stop Loss Orders
IIROC issued final guidance late last week on the use and management of stop loss orders. The guidance comes in the wake of certain anomalous trades last month which prompted IIROC to take regulatory action when automatic triggering of stop loss orders apparently resulted in pricing distortions of Inter Pipeline Fund stock.
A stop loss order is a standing order to sell a security when the price of that security reaches a certain minimum level. Stop loss orders are a method of risk management and are frequently handled by way of automated technology solutions.
IIROC regulated dealers have "best execution" obligations when managing stop loss orders. Technology solutions used for the management of stop loss orders must be designed such that orders are not being entered on marketplaces that would execute at "clearly erroneous" prices.
Some key IIROC guidance on stop loss orders:
- When a stop loss order is triggered, the participant must ensure that the resulting execution does not interfere with a fair and orderly market.
- All stop loss orders without a reasonable limit price are inherently risky in fast moving markets.
- Participants are encouraged to require limit prices on all stop loss orders, particularly when the handling of stop loss orders is automated.
- If a Participant continues to permit the use of market stop loss orders, the use should be limited to orders for the purchase or sale of a particular security which meets all of the following conditions:
- the security is very liquid and displays relatively low historic price volatility; and
- the market stop loss order has a trigger price that is near the prevailing market price for the particular security at the time of entry or acceptance of the stop loss order; and
- the market stop loss order has a volume that is not appreciably greater than the average trade size for the particular security.
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