US exchange Nasdaq Stock Market, part of the Nasdaq OMX group, plans to introduce stock-specific circuit breakers that will operate in conjunction with a similar proposal from the Securities and Exchange Commission (SEC).
The Nasdaq Volatility Guard, which is due to come into effect in the third quarter of this year, will pause trading during uncertain market conditions based on pre-determined thresholds of price changes in Nasdaq-listed securities.
Once initiated, the guard will trigger a 60-second trading pause on Nasdaq in the affected security. Data pertaining to affected securities will continue to be available before, during and after the trading pause. Nasdaq will also continue to accept quotes and orders in affected stocks and disseminate an electronic order imbalance indicator every five seconds during the pause. All market participants will also be able to contribute to the reopening of a stock, which the exchange claims will allow for better price discovery.
Nasdaq’s move closely follows a proposal from the SEC to halt trading in S&P 500 stocks if their price moves by 10% or more in a five-minute period. The SEC scheme – which will run as a pilot phase due to end on 10 December – was announced in response to the so-called flash crash on 6 May, when US markets went into freefall before rebounding. During the crash, some stocks lost over 30% of their value, while others traded at sub-penny levels.
“Nasdaq’s Volatility Guard will protect investors and increase transparency by preventing anomalous trades like the ones that took place on 6 May, while supporting market-makers who bring liquidity to the investor community and our listed companies,” said Bob Greifeld, chief executive officer, Nasdaq OMX.