The latest idea, according to Traders Magazine, is to have an automated process that would track the "peak net notional exposure" of market makers. When a firm's notional exposure approaches agreed-upon caps, the exchanges would send out alerts. When the cap was breached, the exchange would shut down trading by the firm.
According to Traders, the unofficial name for these things will be "big red buttons."
The broker-dealers, of course, worry that they'll be shut down arbitrarily during some event triggering heavy trading. No one wants to tell their customers: "Sorry, pal, can't trade right now. We hit the quota."
One possible solution is to have the caps work on a sliding scale balanced against total volume. During periods of unusually high volume across a number of firms, the caps would rise. During periods of normal or low trading, they'd fall back down. The idea would be to capture abnormal trading volumes suggesting a problem.
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There are more complex possibilities under consideration, according to a person familiar with the matter. Under one of the proposals, broker-dealers would describe in some quite precise terms the circumstances under which they would want to be shut down. This could include unusual volume or even certain algorithmic behavior. The problem, however, is that the more tailor-made and complex the kill switches become, the more likely they are to fail.
In any case, the kill switches are probably quite far from becoming realities. Compliance and risk managers from the market makers and exchanges are still discussing the possible approaches. Once they reach a consensus, the plan will have to be submitted to the Securities and Exchange Commission, and it's anyone's guess how long it will take the SEC to reach a final rule.
