A "kill" switch for overheated trading?

Eurex Aims to Keep Stability In Trading With 'Kill' Switch

Luke Jeffs –WSJ -Eurex, Europe's largest futures exchange by trading volume, will put a special "emergency stop" button on its systems beginning in November, after a surge in computer-based trading volumes raised concerns the market is becoming unstable.

The German-Swiss exchange is to give its main customers -- clearing members comprising banks and brokerage firms -- the ability to block erroneous trades amid fears trading mistakes may be missed as trading volumes continue to rise.

Traders have often joked about “fat fingered” mistakes with electronic trading, and we have had concerns with who is responsible for trading errors if there is a electronic problem, but a larger problem is system overload from electronic trading. The current system even with excess capacity may not be able to process all of the trades coming to an exchange on a crisis day. The actual trades are just one aspect. There is also the problem with the speed of quotes running through the pipes.

The potential for trading halts because of technology failure or by the systematic halting of the trade environment is another form of liquidity risk which investors face. What are the alternatives if someone ‘pulls the plug” on what are the most liquid markets in the world? What are the alternatives for hedging if the liquid instruments cannot be employed?

There is a level of irony that the most liquid markets by volume could be susceptible to unique technological and structural liquidity risks not seen in OTC markets. The problems of running orders into a pit or calling on over-used phones are still present only in a different form. Liquidity risk will be the most pressing trading problem for the next year. Of course, traders have always been concerned about liquidity, but most of this concern focuses on changing bi-ask spreads and not on system failure. The ultimate safety feature for liquidity risk is actually simple. Don’t trade the markets. This could also be the most damaging liquidity problem if investors avoid the market.