Responding to hardware and software glitches that have led to mini market meltdowns in recent years, Nasdaq is looking to implement a “kill switch” to instantly halt questionable trades.

A proposed rule change filed with the Securities and Exchange Commission by the exchange's parent company, Nasdaq OMX, seeks permission to make offer the risk management tool as an option for its listed companies by March 1, 2014. The New York Stock Exchange's parent company, IntercontinentalExchange Group, also plans to implement similar technology, while another exchange, BATS Global Markets, already has one in place.

The kill switch would enable Nasdaq members to establish an acceptable level of net notional risk exposure, a threshold of acceptable volatility, and be notified if those limits are reached so it can instantly halt trading. Those metrics, established at the start of each trading day, can be adjusted throughout the day as needed, and can vary among trading desks. When triggered, the kill switch will result in the immediate cancellation of all open orders. The member must request reactivation, explain the nature of the triggering events, and detail resolution before trading is reauthorized.

The tool will automatically send an email to a market participant as it approaches, and then exceeds, the pre-determined risk and volatility level.

The SEC has also been playing close attention to market-halting "flash crashes" and, in March 2013, proposed Regulation SCI (Systems Compliance and Integrity), new rules that require key market participants to have policies and procedures in place surrounding their technological systems.

The proposal would replace voluntary compliance programs with enforceable rules designed to better insulate the markets from vulnerabilities posed by technology failures.Exchanges, and other designated market participants, would be required to carefully design, develop, test, maintain, and monitor systems that are integral to their operations. New rules would require them to ensure that their core technology meets certain standards, conduct business continuity testing, and provide notifications in the event of trading disruptions or technology failures.

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