Nasdaq OMX Group plans to roll out a “kill switch” that would cut off trading of its member firms when pre-set limits are breached, the exchange operator said in a regulatory filing.
Controlling risk has 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 Inc , 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 U.S. trades and the incident, which cost the firm $461 million, highlighted the risks in the high-speed, nearly fully electronic market.
The chair of the U.S. Securities and Exchange Commission called the heads of the U.S. exchanges to Washington in September and instructed them to offer kill switches as part of a series of reforms aimed at making the markets safer and giving investors peace of mind. The meeting came after a software glitch in August led to a three-hour trading halt in all Nasdaq listed stocks.
Nasdaq plans to offer the kill switch functionality by March 1, according to the filing, which was made available on the SEC website on Wednesday.
Firms can use the tool to set limits on the sizes of positions they can afford to take on. The tool will send email warnings as the limits are neared, and if they are breached, the kill switch will be triggered, trading will be prevented, and the firm’s open orders in the system will be canceled.
If a member firm wants to reauthorize trading after a kill switch has been triggered, it will have to contact Nasdaq and explain why the breach occurred and why it is safe for the exchange to reauthorize order entry.
IntercontinentalExchange Group’s New York Stock Exchange said in December it plans to offer a kill switch, while No. 2 U.S. exchange operator, BATS Global Markets, already has one in place.