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Nasdaq OMX Nordic wards off HFT swings with new 'volatility guards'

27 September 2010  |  8567 views  |  0 graph

Nasdaq OMX has introduced 'volatility guards' for its Nordic and Baltic markets, ensuring that trading will be paused in stocks that see a sharp price change.

The volatility guard is a trading pause and resumption process designed to restore an orderly market in a single security listed on Nasdaq OMX's exchanges in Stockholm, Helsinki, Copenhagen, Iceland, Tallinn, Riga and Vilnius and the First North growth market.

It will kick in if an order deviates too much in percentage from the last sale price or the reference price. When triggered, continuous trading is halted and followed by an auction period which lasts 60 to 180 seconds, after which the order book moves back to continuous trading.

The exchange operator says it has introduced the measure to help tackle the issues and demands thrown up by technology-driven high-speed trading, ensuring investor and listed company confidence in price formation integrity.

Hans-Ole Jochumsen, president, Nasdaq OMX Nordic, says: "One of the important lessons that we have learned from the recent market volatility and the financial crisis is the importance of a coordinated strategy to combat market instability, as well as the new complexity of modern, integrated and highly electronic markets."

In the US circuit breaker rules, requiring trading in a Standard & Poor's 500 stock to pause for five minutes if its price changes by more than 10%, were introduced in June in response to the so-called "flash crash" on 6 May, which saw the Dow Jones industrial average plummet in minutes.

Meanwhile, the fallout from the crash continues with speculation growing that a new "limit up / limit down" system could be introduced instead of or alongside circuit breakers.

According to Reuters, the SEC and exchanges are holding informal talks on the system, which provides temporary ceilings and floors for stocks that refresh regularly through the day. This means big price swings are slowed without trading needing to halt altogether.

The limit up / limit down system, used in US futures markets since 1987, could be rolled out by the end of the year, says Reuters.

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