BOCA RATON, Fla. — The major national exchanges are coming close to agreeing on a set of basic standards for how ‘kill switches’ should work across all their markets, according to Burke Cook, Managing Director at Nasdaq OMX Group.
The plan for the switches, also being referred to as ‘big red buttons,’’ could be wrapped up for submission to the Securities and Exchange Commission by June 1, Cook said at the Securities Industry and Financial Markets Association 2013 Operations Conference here.
The exchanges, broker-dealers, other market participants and the SEC all have been involved in “working out a solution,’’ Cook said, for preventing the kind of disruption caused last August 1 by the flood of erroneous orders sent out by market maker Knight Capital Group.
“Everyone is in agreement that we need some form of a big red button,’’ Cook said. It’s need to “prevent collateral systemic damage, unintended technology disruptions and extreme events.’’
Target date for launch of the unified systems would be by the end of this year, he said.
The standard approach would follow an outline submitted last fall by an industry working group, to federal regulators.
Triggering a potential shut down of abnormal activity would be a metric called “Peak Net Notional Exposure.’’
This calculation would place limits on the overall activity of a member firm and, “if the firm breaches its set limit, the SRO would shut down the trading session,’’ according to the letter submitted by the exchanges, FINRA and DTCC to the SEC Friday.
Here is how the ‘kill switch’ would work.
Exchanges would establish and maintain controls that track the “peak net notional exposure” of a market maker, brokerage, trading firm or other member firm, throughout a trading day.
Limits would be set for the total financial exposure taken on each day by a market participant. Long or short positions, or combination long and short positions, would each count against the total exposure taken on. Going long $600 on one stock and $400 short on another, for instance, would count as $1,000 “net” exposure.
The caps would be designed to spot excessive market activity, such as occurred on August 1. When a firm hit its limit, the exchanges would send out an alert. If the peak is exceeded, the exchange would shut down trading by the member firm.
The caps could be adjusted, so that they rose, or fell, in relation to the amount of overall trading volume occurring on a given day on a given exchange.
BATS Global Markets has rolled out a set of tools available at no charge to all members of its U.S. equities and equity option markets to help them mitigate risk.
The tools are available to all members of the BATS BZX Exchange, BYX Exchange and BATS Options market.
BATS Global Markets has rolled out a set of tools available at no charge to all members of its U.S. equities and equity option markets to help them mitigate risk.
The tools are available to all members of the BATS BZX Exchange, BYX Exchange and BATS Options market.
Direct Edge has built in pre-trade risk controls, including automated and manual kill switches, into the software that matches orders on its EDGA and EDGX exchanges.
The kill switches and other controls are being provided at no cost to brokers that are members of its two exchanges, according to head of sales Bryan Christian.
The Depository Trust and Clearing Corporation is also believed to be working on a ‘’big red button’’ that work work out of its clearing and settlement systems, throttling activity of brokers whose orders or financial exposure got out of hand, Cook said.
DTCC could not be reached for confirmation.
One large sellside broker, Morgan Stanley, said it did not wait for the Knight event to start working on a kill switch.
“We have a big red button,’’ said executive director Denise Garrett. “We have it throughout our whole business.’’
The ‘button’ has been developed by the Quality Assurance and Production Management (QAPM) division of Morgan Stanley’s technology organization. QPAM used to be known as the Trading Support Group.
These are “IT teams in the trenches’’ that spread applications and capabilities across trading desks.
Actually, it’s “a little bit more like there are several big red buttons” through equities, bond trading and other parts of Morgan Stanley operations, Garrett said.
Now, the technology support group is working through “what can we do better if we put our FINRA thinking cap on,” she said.
But, she said, having a ‘big red button’ means nothing if there are not established policies and procedures for how it will get used.
And who can push it.
