NASD Board OKs Limited Trading-Halt Proposal
The parent organization of the Nasdaq Stock Market voted Thursday to allow brief trading halts to be imposed on volatile stocks, but the plan is significantly watered-down from an earlier proposal that advocated more frequent halts when stocks fluctuate wildly.
Separately, the organization took a step toward requiring that “day-trading” firms closely screen their clients, agreeing to put that controversial idea out for public comment.
In a long-anticipated vote with potentially major implications for small investors, the National Assn. of Securities Dealers gave Nasdaq’s market surveillance unit the ability to halt trading without first notifying the company that issued the stock. Currently, Nasdaq must consult the company before imposing a halt.
However, the final plan is a severely weakened version of an earlier proposal by NASD Chairman Frank Zarb. That plan would have given Nasdaq far greater leeway to implement trading halts to combat volatility in Internet and other high-risk stocks, in the name of protecting small investors.
But Zarb’s proposal was rejected on Wednesday by a subsidiary Nasdaq board, and was never considered by the parent board Thursday.
Instead, the board limited Nasdaq’s ability to order halts on it own to situations where “it appears that significant corporate news” is driving a stock, directly affecting maintenance of a “fair and orderly market in the security.”
“It’s an extremely narrow version,” said one board member, who requested anonymity. “It’s not the controversial” plan.
The NASD board took several other steps Thursday to improve trading of Nasdaq stocks. It endorsed a rule to eliminate so-called locked or crossed markets, and it reduced the prices individuals may pay for real-time market data.
All of the proposals, except for the day-trading one, now go to the Securities and Exchange Commission for approval.
The NASD began looking at stepped-up trading halts in the wake of the extraordinary volatility in Internet stocks that began last fall.
In theory, by selectively imposing trading halts Nasdaq would give investors--especially individuals--the chance to calmly analyze news in a fast-moving stock rather than become compelled to quickly buy or sell, risking that their orders will be filled at prices far higher or lower than expected.
But many NASD board members disagreed that halts would help small investors, and they didn’t like the idea of interfering with the natural flow of the market--even though the rival New York Stock Exchange has a more liberal policy about ordering such halts.
“It’s been the tradition of Nasdaq to keep the market open,” one board member said.
Two Nasdaq subcommittees had earlier rejected the trading-halt proposal.
The day-trading proposal, aimed at brokerages that have sprung up in recent years to allow individuals to rapidly trade stocks via special computers, also has generated intense controversy.
Zarb suggests requiring the brokerages to extensively screen new customers to ensure that they’re “appropriate” for day trading. He also would require day-trading firms to provide a disclosure statement to customers spelling out all of the risks involved.
Critics say it isn’t fair that specialized day-trading firms should face an “appropriateness” requirement if investors who trade actively online from home do not.
They also say that investors should be able to decide for themselves whether they can handle the high risks involved with day trading.
The vote Thursday gives brokerages the ability to submit formal comments on the proposal, after which the NASD board will consider it again.
In other votes, the board:
* Endorsed a one-year test program that would slash in half the fees that brokerages and other firms pay to provide real-time stock quotes to individuals. Real-time quotes are critical to active traders because they base buy and sell decisions on up-to-the-moment prices.
* Proposed changes to prevent locked or crossed markets. Under normal conditions, brokerages offer to buy a Nasdaq stock from investors at one price and sell it to them at a higher price. They make a profit from the so-called spread between the two prices.
Stocks become locked when the two prices are the same and crossed when the sell price is higher than the buy price. Either can occur in fast-moving markets, especially at the opening each morning.
The NASD proposal would require that brokerages more actively communicate locked or crossed situations with each other and require firms to either trade or move out of the way to correct the situation.
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Walter Hamilton can be reached by e-mail at walter.hamilton@latimes.com.
