Intercontinental Exchange Group's NYSE Euronext unit has filed a plan with regulators to offer firms that trade on the New York Stock Exchange a "kill switch" that could cut off trading if preset levels were breached.
Risk controls have been a major focus for the securities industry in the wake of high-profile snafus like the August 2012 glitch at Knight Capital Group, now a part of KCG Holdings, that sent a flood of errant orders to the NYSE, nearly sank the firm and led to its takeover by rival Getco. Knight was one of the biggest executors of US trades.
An industry round table convened by the US Securities and Exchange Commission (SEC) in October 2012 focused heavily on the idea of exchanges having kill switches to contain high-speed trading errors and give investors peace of mind.
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Nearly two years and a series of market glitches later, SEC Chair Mary Jo White called on all exchanges to implement the risk limit tools as part of a series of reforms. White met with executives, including the heads of NYSE, Nasdaq OMX, BATS Global Markets, Direct Edge, and the Chicago Board Options Exchange, in September following a software glitch in August that led to a three-hour trading halt in Nasdaq stocks.
Currently, BATS and Direct Edge offer kill switch functions.
Under the NYSE proposal, the exchange's member firms will have the option of pre-setting certain trading thresholds that when hit would block the firms' orders.
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"The risk management tools will provide member organizations with the ability to segment activity into risk groups and to monitor exposure in real time as trades execute," NYSE said in a SEC filing dated December 20 that was posted on the regulator's website on Monday.
Firms can adjust their levels during the day, if need be, and can choose to have alerts sent to them as exposure limits are approached and breached, or can have the system automatically block orders upon a breach.
NYSE said the kill switch is meant to be supplemental, acting as a backstop for its member firms' internal monitoring and risk management procedures.
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NYSE's fully electronic marketplace, NYSE Arca, also filed with the SEC a proposal to create a kill switch for exchange-traded products, such as exchange-traded funds and exchange-traded notes.
Separately, the Depository Trust & Clearing Corp (DTCC), which processes all US stock transactions, said last month it plans to roll out a market-wide risk monitoring tool. Unlike the exchange kill switches, the DTCC tool would alert firms when trading levels have been breached only after the orders have been executed, and it would not block new incoming orders.
The benefit of the DTCC tool would be that it will monitor a firm's orders across all markets, instead of on just one exchange.