How can an exchange or ATS better manage periods of extreme market stress or volatility?

Can a “flash crash” be averted? Or better managed?

Yes, says the Board of the International Organization of Securities Commissions, which is now seeking feedback on its recently proposed recommendations to assist trading venues and regulatory authorities in the implementation of mechanisms to manage extreme volatility.

Extreme volatility in securities markets can undermine IOSCO’s objective of ensuring that markets are fair, efficient and transparent, weaken market integrity and reduce investor confidence.

Following recent extreme volatility events, regulatory authorities and trading venues have been reviewing their approaches to managing extreme volatility; volatility control mechanisms seek to minimize market disruption triggered by events such as erroneous orders, by halting or temporarily constraining trading.

In a consultation report, “Mechanisms Used by Trading Venues to Manage Extreme Volatility and Preserve Orderly Trading,” IOSCO explored the measures that trading venues use to address the risks posed by extreme volatility. The report finds that these mechanisms can be an effective way for trading venues to mitigate the effects of extreme volatility and preserve orderly trading.

In the report, IOSCO proposes eight recommendations to assist trading venues and regulatory authorities when considering the implementation, operation, and monitoring of volatility control mechanisms. Specifically, the report recommends that:

• trading venues should have mechanisms to manage extreme volatility and these mechanisms should be appropriately calibrated and monitored;
• regulatory authorities should consider what information they require to effectively monitor the overall volatility control mechanism framework in their jurisdiction, and ensure that trading venues maintain relevant records;
• information about volatility control mechanisms and when they are triggered should be made available to regulatory authorities, market participants and, if appropriate, the public; and
• communication amongst trading venues should be considered where the same or related securities are traded on multiple trading venues in a particular jurisdiction. In addition, where the same or related instruments are traded in different jurisdictions and the mechanism is triggered, communication may be appropriate.

The report also highlights the issues that arise where this information sharing and communication between trading venues occurs across jurisdictions.

IOSCO has made it a priority to advise the markets on how technology is changing how markets operate and how both regulators and markets should respond to these changes. Specifically, the report builds on the recommendations in IOSCO´s 2011 report Regulatory Issues Raised by the Impact of Technological Changes on Market Integrity and Efficiency, which addressed the broad technological changes impacting markets, including high frequency trading and measures used to address volatility, including trading halts, circuit breakers and price limits.

Public comments on this consultation paper should be submitted on or before 6 May 2018

IOSCO is the leading international policy forum for securities regulators and the organization’s membership regulates more than 95% of the world’s securities markets in more than 115 jurisdictions and it continues to expand.

The Board is the governing and standard-setting body of the International Organization of Securities Commissions (IOSCO), and is made up of 34 securities regulators.