Nasdaq To Show Lawmakers Detailed Circuit Breaker Proposal

Nasdaq OMX Group Inc. (NDAQ) will lay out on Tuesday specific recommendations for when trading in certain stocks should be temporarily halted to help guard against price gyrations that roiled the markets last Thursday.

The exchange operator's head of transaction services Eric Noll will give his suggestions alongside representatives from NYSE Euronext (NYX) and CME Group Inc. (CME) at a hearing Tuesday before the House Financial Services Capital Markets Subcommittee.

Noll will tell lawmakers that new rules are needed which would call for a 15-minute halt in trading when the Standard & Poor's 500 stock index falls 5% and a one-hour stoppage when the S&P 500 falls 10%. If the S&P 500 were to fall 20%, trading would be halted for the remainder of the day.

"We must learn the lessons" from last Thursday, Noll said in prepared testimony.

The heads of the Securities and Exchange Commission and the Commodity Futures Trading Commission are both trying to get to the bottom of what caused the Dow Jones Industrial Average to drop nearly 1,000 points before rebounding. They will also testify on Tuesday, just one day after the SEC met with top equities-exchange officials and announced they have all agreed in principle to a market-wide circuit breaker that would temporarily halt trading when a stock falls below a certain level.

The CFTC is involved in the review because of some unusual trading that occurred on May 6 in the "E-Mini" listed at CME, which is tied to the S&P 500. Some have opined that an erroneous trade in the E-mini may have led to the market decline, but CME has disputed that charge and plans to tell lawmakers Tuesday that the markets functioned properly,

Nasdaq's Noll, however, noted in testimony that "Aggressive, nervous selling of S&P 500 futures migrated to trading of closely correlated cash equities."

Noll, NYSE Euronext's Chief Operating Officer Larry Leibowitz and CME Group's Executive Chairman Terry Duffy will all tell lawmakers that they support the SEC's plans to explore a single-stock trading halt that would span the entire U.S. stock market. The exchange that lists the product would initiate both the halt on the trading and the resumption of trading.

"We believe that developing a workable market-wide process for declaring an ongoing trading halt or reopening trading, even in the most difficult of market conditions, is essential to this effort," Leibowitz said in prepared testimony. He added that in order to minimize any disruption on competition that this may cause, Congress should pass a law to consolidate all self-regulatory functions into one single securities self-regulator.

NYSE also plans to advocate for changes to Regulation NMS, an SEC rule which aims to facilitate electronic trading in normal market conditions to make sure trades aren't routed away from markets displaying the best prices. But on May 6 when certain stocks began to plummet, the NYSE switched from electronic trading to manual trading, and Reg NMS was bypassed.

"The ability of markets to bypass a manual market by default resulted in a situation where the markets effectively chose to ignore and trade around our quotes once our circuit breakers were triggered," Leibowitz said. "The events of May 6 have demonstrated that it is time to reconsider the ability of markets to trade through functioning quotes as a default matter."

Nasdaq, meanwhile, will offer some additional suggestions including requiring priced orders rather than market orders and eliminating or limiting "stub quoting," the practice of posting a bid far outside the current market, such as bidding one cent for a $100 stock.

-By Sarah N. Lynch, Jacob Bunge and Kristina Peterson, Dow Jones Newswires; 202-862-6634; sarah.lynch@dowjones.com

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