Commentary

Richard Repetto
Traders Magazine Online News

Why Do Exchanges Own Multiple Licenses? It's Not Hard To See, Look at the SEC

In this recent research note, Sandler O'Neill + Partners, L.P. Principal Richard Repetto examines why the public exchange operators hold multiple licenses and that rationale behind this phenomenon.

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April 1, 1999

Trading Halt Raises Difficult Questions

By William Hoffman

Some traders protested when the National Association of Securities Dealers pressed to give senior management discretionary power to halt trading in individual Nasdaq stocks.

With volatility causing troublesome trading patterns in some Nasdaq issues locked and crossed markets in the Internet sector, for instance nudging the plan was just one of several steps taken by Nasdaq.

Nasdaq previously approved a measure extending the preopening time on initial public offerings to as much as 30 minutes. Market-making firms face fines of up to $15,000 for locking or crossing markets.

In January, volatility was particularly prevalent on Nasdaq.

Nasdaq officials say that in January, certain stocks in some markets locked or crossed about a hundred times a day, with an average delay of about one minute.

Some steps are obviously necessary to alleviate the chaos.

Georgetown University finance professor Jim Angel, conversant in the intricacies of trading halts, said there are usually two reasons to stop trading in particular issues.

One is to disseminate information that would not be absorbed by traders until it was too late.

Trading might also be stopped to reset the market to opening option conditions if there is an order imbalance.

This second reason raises more questions. "Just turning off the switch for a period of time is not as easy to do as it is on the New York Stock Exchange," Angel said.

And once trading is stopped, how does the exchange bring about a more orderly restart?

On March 25, the NASD board of governors approved a rule giving its officials the power to shut down trading in individual stocks moving on news or rumors.

The board also approved a rule that aims to provide an accurate price on stocks locking or crossing the market between 9:20 a.m. and 9:30 a.m.

A third proposal, allowing Nasdaq officials to halt trading at times of excessive volatility, was withdrawn by the board. The first two measures are still subject to approval by the Securities and Exchange Commission.