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March 1, 1999

Nasdaq's Latest Pitch for Trading Halts

By Jeffrey L. Winograd

The latest effort by Nasdaq regulators to introduce trading halts on excessively volatile stocks hinges on the March 25 board of governors meeting of the National Association of Securities Dealers.

A subcommittee of the Nasdaq Quality of Markets Committee, charged with studying recent volatility on Nasdaq, had earlier rejected the use of trading halts. Later, the full committee voted against giving Nasdaq senior management discretionary power to introduce halts.

But NASD Chairman Frank Zarb is counting on the board to revive the plan. As currently envisoned by Nasdaq staff, the plan would last for a 12-month trial period.

During the trial period, trading in individual stocks would be halted "when there appears to be significant corporate news or when a company's security is experiencing extraordinary volatility, either of which is impacting the fairness and orderliness of the market."

A plan accepted by the NASD board would still need final approval by the Securities and Exchange Commission.

The push by Nasdaq comes as the SEC's chairman, Arthur Levitt, warned about the risks inherent in online trading, and as New York State Attorney General Elliot L. Spitzer announced he would investigate the Internet stock-trading industry.

"We are at historically high levels of volume, valuation, transparency and ease of market execution," Zarb said. "But this activity has also brought us new issues of volatility and trading practices, issues that must be addressed by the exchanges and member firms to preserve the fairness of the market for investors."

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While the meeting on February 18 of the Nasdaq Quality of Markets Committee, which comprises representative of market-making and buy-side firms, rejected a plan giving Nasdaq senior management power to introduce halts, Nasdaq officials are undeterred.

"Although a majority of the [Nasdaq] Quality of Markets Committee voted against giving Nasdaq senior management discretionary authority to halt trading in individual stocks under certain conditions of extreme volatility," Nasdaq spokesman Scott Peterson said in a statement, "we believe the issue is important enough to be considered by the entire NASD board of governors [on March 25]."

NASD rules allow the board to introduce a plan without prior approval by the Nasdaq Quality of Markets Committee. "Consensus is sometimes hard to build and sometimes staff has to act," said a recently retired member of the committee, declining to be named.

Some traders view the use of trading halts with caution, contending that their introduction could exacerbate volatility on Nasdaq. Other traders are concerned about how the brakes will be applied on runaway stocks, noting that until recently, no criteria was proposed.

Lee Korins, the new president of the Security Traders Association, said that dealers must be protected by whatever plan emerges. Although he said he was no fan of trading halts, he did note that there were times when halts helped individual investors.

"There has to be some way of reaching agreement when a situation is out of hand," he added.