BRENDAN MCDERMID
The "flash crash" of Canada's stock markets in May was due to a dominance of sell orders at the opening of trading, the withdrawal of electronic traders from Canadian markets and the triggering of investors' stop-loss orders as markets slid.
A review of Canadian trading patterns on May 6 by the Investment industry Regulatory Organization of Canada (IIROC) found no evidence of erroneous orders, computer glitches or any futures or options trading that spurred the decline in Canadian markets, according to a report issued Thursday.
IIROC said a review of 47 securities that faced the sharpest declines on May 6 found no one factor was common to all stocks examined, and an array of issues helped exacerbate the steep market drop.
The report concluded that while Canadian markets reacted rapidly to the decline in U.S. markets - with Canada's market drop lagging the U.S. by about two minutes - the drop in Canada "was neither as steep nor pronounced as that in the U.S. market."
The unexpected market crash saw stock markets across North America fall by more than 5 per cent in a matter of minutes on May 6, then recover a short time later. Canada's S&P/TSX Composite Index fell a total of 453 points, or 3.8 per cent, that day, but quickly reversed itself and closed the day down just 33 points from the day-earlier close.
The report proposes that IIROC study several reform options to prevent a similar steep crash in the future, including examining the market-wide circuit breaker function to see whether current trigger levels are appropriate. IIROC will also review whether Canada needs a Canadian-based circuit breaker level that is independent of U.S. markets.