Last week, the Investment Industry Regulatory Organization of Canada released draft guidance on the use and management of stop loss orders. While IIROC's 2011 guidance on best execution addressed the management of stop loss orders in an attempt to prevent such orders from executing at "clearly erroneous" prices, regulatory intervention has still been required in a number of cases.

According to IIROC, the disruption of a fair and orderly market could occur where the execution of an order would result in the trigger of a single stock circuit breaker or exceed the "no touch zone" limits for which there will generally be no regulatory intervention. With IIROC considering all stop loss orders without a reasonable limit price to be "inherently risky in fast moving markets", the guidance would encourage that Participants require limit prices on all stop loss orders, especially in cases of automated handling of stop loss orders.

The proposed guidance also considers the expectations when "booking" a stop loss order on a marketplace, the ongoing regulatory expectations respecting stop loss orders that have been booked, and the expectations if execution of a triggered stop loss order is handled manually. IIROC also states that while it is not prohibiting stop loss orders that when triggered become market orders, it is considering doing so in the future. For more information, see IIROC Notice 13-0106.