Nasdaq Panel Won't Endorse
Plan to Halt Volatile Trading
By AARON LUCCHETTI
Staff Reporter of THE WALL STREET JOURNAL
Hold on tight, Internet investors.
Despite concern over the volatility rippling through many Internet-related stocks, traders and
investors can't seem to agree on how to deal with the wild price swings.
Late Monday, a subcommittee of mostly Nasdaq Stock
Market dealers voted to recommend against halting trading
in individual stocks that move too violently on the market,
operated by the National Association of Securities Dealers.
Some traders had endorsed the idea, but others feared that
halting the trading of volatile stocks might result in even more vicious price swings and confusion
when trading resumed.
While individual stock trading is stopped occasionally on so-called auction markets, which have
trading floors, such as the New York Stock Exchange, it rarely happens on Nasdaq's screen-based
dealer market, where many of the most volatile issues trade.
The committee was formed late last year in response to unusually sharp intraday price moves in
Internet stocks. Some traders were particularly concerned about the difficulty of trading in stocks
moving five to 10 dollars in minutes.
Advocates of the trading halt argue that it could
allow investors to take a more considered
approach to buying and selling decisions. "The
importance of the halt is it lets people know
there's been a huge price change, and it gives
investors a chance to rethink whether they want
to buy the stock," said Bernard Madoff,
chairman of Bernard L. Madoff Investment
Securities and one of the four members of the
11-person NASD panel voting for trading halts.
Mr. Madoff said moves in stocks like
Amazon.com Inc., Yahoo! Inc. and other
smaller, harder-to-trade Internet stocks would
benefit from halts. Price swings in those stocks
have been so rapid that they have prompted
complaints from some investors about the price
at which their orders are being executed. The
halts are needed for "stocks that move 40% in less than an hour," Mr. Madoff said. "There is a
need for a safety valve during these very volatile times."
Many Internet issues are moved in part by floods of small orders from individual investors trying
to profit on intraday moves. Shares of online bookseller Amazon.com fluctuated between $125
and $163 on Jan. 13, Web auctioneer eBay Inc. moved between $166 and $220 on Jan. 22 and
Web-page provider Xoom.com Inc. zoomed between $46 and $61.50 Jan. 28.
Internet stocks' volatility is most evident in new public companies, whose shares sometimes triple
or more in the first days of trading. Tut Systems Inc., a data-transmission company, quickly
soared to a high of $63.375 from an offering price of $18 Friday. The stock eventually settled
back to $57.50 but then traded wildly again on Monday, moving as high as $86.5625 before
closing at $71.25.
Nasdaq dealers were prompted to examine how to mute volatile moves by a crush of
customer-trading demand, fueled at least in part by the ease of placing buy and sell orders on the
Internet. Last month, the U.S. Securities and Exchange Commission approved a Nasdaq proposal
to slow down the opening process on volatile initial public offerings.
The IPO-trading proposal passed Nasdaq late last year, but the issue of halting volatile stocks
across the board was more controversial. Holly Stark, head trader for Dalton, Greiner, Hartman,
Maher & Co. and a member of the Nasdaq Quality of Markets Committee -- a separate panel that
is scheduled to discuss recent volatility spikes at a meeting this month -- said one difficulty is
determining a formula for halting stocks. "A point to halt trading might be right for one stock
but wrong for another," she said.
Another problem lies in who would decide to stop trading and later reopen it. On the New York
Stock Exchange, trading can be shut down relatively efficiently because most orders flow to one
specialist trading post on the exchange floor. On Nasdaq, however, competing dealers, sometimes
numbering in the dozens, set their own price quotes to buy and sell shares of stock. Because the
Nasdaq system is more dispersed, recognizing an order imbalance that warrants a trading halt is
trickier.
The increased volatility is prompting some trading firms to reduce their exposure to fast-moving
stocks. Bear, Stearns & Co. last month stopped trading certain Internet stocks it deemed too
volatile. And stock wholesalers like Herzog Heine Geduld Inc. have scaled back trading guarantees
for Internet stocks. Under the guarantees, the stock-trading firm pledges to customers, who are
often discount brokers, that it will buy or sell a certain number of shares at the current market
price. In many cases, the guarantees have been reduced to 2,000 shares from 5,000 or eliminated
altogether.
The scaleback in guarantees came after firms found themselves taking into inventory thousands
of shares in a quickly moving market. For example, if a stock-wholesaling firm honors its
commitment to buy 40,000 shares of a stock from its customers, it may find it difficult to
immediately resell those shares in the market.
Some discount brokers are attempting to protect themselves, and their customers, too. Charles
Schwab Corp., the nation's largest online broker, raised its margin-maintenance requirement on
23 Internet stocks to 70% from 50% earlier this week. The maintenance margin is the amount of
money an investor must have in his or her account when borrowing to buy stocks. Several other
trading firms have restricted online trading in particularly volatile stocks and have stopped taking
market orders, which haven't any price limit, in some initial public offerings.
The volatility hasn't been confined to Nasdaq. Shares of Perot Systems Corp. Tuesday more than
doubled on their first day of trading on the Big Board, finishing at $43.50, up $27.50 from an
offering price of $16. The stock was halted once during the trading day for an order imbalance. |
