Stock markets are occasionally unruly free-for-alls—or freefalls. The May 6 “flash crash” —where the Dow Jones Industrial Average plunged almost 1,000 points intraday—has sent securities regulators searching for explanations, culprits and safeguards.

While the flash crash was less severe in Canada—the sympathetic movement on the Toronto Stock Exchange lagged the U.S. by two minutes, say Canadian officials, and the market experienced less than half the drop of the U.S. indexes—the people charged with monitoring the second-by-second movements of Canadian equities for out-of-class behaviour have also opted for more safeguards.

The idea is to call a time-out when stock movements get disorderly by using single stock circuit breakers. In Canada, the Investment Industry Regulatory Organization of Canada has always had the ability to call a general market halt. But trading in single stocks has been dealt with manually.

IIROC, following the lead of U.S. regulators, is proposing trading halts for individual stocks should they move up or down significantly in a short period. For a TSX-listed stock, the circuit parameters are a 10% change within five minutes, leading to a five-minute trading halt. For stocks on the Venture Exchange and CSNX, a 20% change over 10 minutes would lead to a 10-minute trading halt.

“The implementation of single-stock circuit breakers (SSCBs) would provide a mechanism that would halt trading of a security experiencing rapid, significant and unexplained price movement,” IIROC says in a consultation document.

“IIROC undertakes real time surveillance of all marketplaces and we receive alerts when there’s unusual trading activity,” says James Twiss, vice-president, market regulation policy, who was speaking earlier this week at a Strategy Institute summit on trading technology and risk management in Toronto. “May 6 obviously generated alerts for us. One of the shortcomings we have in our system is that alerts and the subsequent halt that is imposed have always assumed that there is one stock (affected) at a time.”

Once a stock triggers an alert, it goes to the surveillance staff. The manual process seems to have worked, since 90% of Canadian stocks trade less than once every five minutes, according to Twiss. “What happened on May 6 was that there was a series of stocks having alerts at the same time. So this creates a difficulty.”

Some who might benefit from individual circuit breakers are do-it-yourself investors using on-stop market orders—or stop-loss orders. A stop-loss order is triggered when a stock declines by a certain percentage. Because they were market orders they “will continue to chew [their] way through the book and the orders that are there and ultimately trade,” Twiss notes. But in a plunging market, there may be no bottom for a market order.

“What we also noticed was the use of on-stop orders tended to be concentrated in exchange traded funds and that was one reason that we found that they were amongst the most volatile on that day.”

Contributing to that volatility is the fact that many discount brokerages have automated on-stop orders, as a response to consumer dismay over orders that were not executed in the aftermath of the financial crisis in 2008.

“A number of clients were complaining that their on-stop orders didn’t get executed when price changes occurred so some firms actually automated so that now when it’s triggered into the market, it doesn’t go to the trading desk and there’s no ability for a trader to say this is a temporary dislocation.” Twiss says. “So it just compounds itself.”

He thinks investors should use limit orders, not market orders—so that they know the range within which their sell order could be filled ; but they also need better education.

IIROC has the ability to vary and cancel erroneous orders. In the end, Twiss says, 14 securities that traded outside a 20% band were repriced that day.

The single-stock circuit breaker is part of a series of moves securities regulators are undertaking.

After May 6, the Canadian Securities Administrators made five recommendations, including a review of the existing market-wide circuit breaker; an investigation into the feasibility of single stock circuit breakers; the adoption of volatility controls by all marketplaces; more effective management of stop-loss orders; and an examination of current erroneous order practices and policies.

The CSA is also looking at electronic trading as a whole. It’s last set of proposals were released in 2007—when electronic trading was nascent in Canada. “we’re taking a fresh look at how trading is taking place, says Sonali GuptaBhaya legal counsel in the market regulation branch of the Ontario Securities Commission.

Specifically, the CSA intends to examine systemic risk, risks to dealers and their capital and risks to the regulatory system, including market integrity. A key question is “how do you measure the quality of a market.”

Scot Blythe is a Toronto-based freelance financial journalist, and author of blog on InvestmentReview.com. Tracking Error.