Stop the Markets!: Some Trading Firms Looking at Measures to Control Volatility

High-Frequency Trading Leaders Forum 2011

As reported by Jacob Bunge, of Dow Jones newswires, a group of the world’s biggest trading firms said that all exchanges should develop electronic systems that briefly pause trading when prices begin to rapidly swing, in an effort to ensure markets don’t run off the rails.

A seconds-long pause in electronic trading could go a long way toward preventing a sudden meltdown like the “flash crash” of May 6, 2010, according to the FIA Principal Traders Group, a division of the Futures Industry Association trade body. Exchange-backed measures to protect against overheated market moves have come front and center again this month, after the Dow Jones Industrial Average on Friday marked a solid week of triple-digit gains and losses.

In a letter late Tuesday, the trading group wrote that it “recommends that all trading venues adopt automated means, to briefly pause their market in the event that a circuit breaker is triggered.” The recommendation came in response to questions posed by a body of international market regulators. The FIA-backed group, with U.S. and Europe divisions, includes some of the most influential firms in electronic trading, including Citadel LLC, Knight Capital Group (KCG), Getco LLC and Allston Trading LLC.

The effort came in response to questions around high-frequency trading — a tool used by some members — and to represent private trading shops’ views before regulators. Such brief pauses in trade already are in play at some markets, such as the futures platforms run by Chicago-based CME Group Inc. (CME). The Principal Traders Group wrote Tuesday that a brief hold in buying and selling early on in the 2010 flash crash helped stabilize prices in CME futures linked to the Standard & Poor’s 500 stock index, allowing them to recover much faster than the broader stock market.

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