NASD Panel OKs Limited Trading-Halt Proposal

From Bloomberg News

The National Assn. of Securities Dealers board Thursday approved a watered-down proposal to impose trading halts on volatile Nasdaq stocks, after rejecting a broader plan submitted by Chairman Frank Zarb.

The board also took a slower approach with a proposal to require day-trading brokerages to screen customers for their suitability for such rapid-fire trading. NASD invited public comment before reconsidering the idea.

The trading-halt proposal, which now must be approved by the Securities and Exchange Commission, would let the Nasdaq Stock Market move more quickly to temporarily stop trading on stocks that are the subject of news.


The plan, which seeks to protect investors from wide stock swings, would allow Nasdaq executives to intervene without first notifying the company involved. Currently, Nasdaq must wait until its executives reach the company before it can halt trading.

A more significant trading-halt proposal, pushed by Zarb, never made it to the NASD board because it was rejected by the subsidiary Nasdaq board, NASD Senior Vice President Michael D. Jones said.

That proposal would have given Nasdaq executives the discretion to halt trading when small and mid-size Nasdaq stocks start to fluctuate wildly.

The Nasdaq board, headed by former Microsoft Corp. Chief Financial Officer Michael W. Brown, rejected the proposal Wednesday, blocking it from consideration by the parent NASD board, Jones said.

Two Nasdaq advisory committees previously opposed trading halts after institutional traders argued that such halts could trap investors in a falling market and interfere with market operations.

NASD started wrestling with trading-halt proposals last year amid concern about wild price swings in some Internet stocks.

The day-trading suitability proposal, meanwhile, would require brokerages to disclose the specific risks of making such trades in stocks that can be volatile. The more controversial part of the plan would require firms to consider whether this type of trading is “appropriate” for each customer’s investment goals.

A group of day-trading firms criticized the proposal, saying it could unfairly expose these firms to greater legal liability.

“We’re cautious about anything that singles out one component of the market when there’s been no pattern of complaints about that segment,” said James Lee, president of Electronic Traders Assn. and Houston-based Momentum Securities day-trading brokerage.

The NASD board also Thursday proposed a one-year pilot program requiring dealers whose Nasdaq quotes are “locked” or “crossed” to accept trades at those prices or change their quotes, starting each day at 9:20 a.m. Eastern time.

These trading jams, which can last as long as 20 minutes, occur when “buy” quotes equal or exceed “sell” quotes--often after electronic orders pile up for a stock.

Separately, the board proposed requiring Nasdaq market makers to lower their current quote for a stock if they fail to execute a large order.

The “trade or move” proposal also would prohibit market makers from using an electronic system to repeatedly execute small orders without filling the larger order.