Nasdaq OMX Group Inc. (NDAQ) is eyeing new rules that would require some major market participants to keep trading through periods of intense price volatility, according to a senior executive.

After the dramatic market swings of May 6, Nasdaq OMX has crafted a proposal that would increase minimum obligations for market makers in stocks, according to Eric Noll, head of transaction services for the exchange operator.

Nasdaq OMX has circulated the idea among other market centers and regulators, Noll said Tuesday in testimony at a Washington hearing set up to discuss U.S. market matters.

Regulators are considering tougher obligations for big market makers, which stand ready to take the other side of customers' orders, ensuring liquidity.

The severe price drop and rapid recovery seen on May 6 prompted some of the biggest providers of liquidity in U.S. stocks to withdraw from the market, which critics have alleged exacerbated the plunge.

Trading firms have replied that staying in the market when information is unreliable and systems seem out of whack is at best irresponsible, and at worst could put their companies out of business.

Noll said the Nasdaq OMX proposal, aimed at being implemented across all trading venues, would see some market makers be required to quote at the best price available nationally for a set percentage of the trading day.

The exact percentage is up for debate, Noll said in an interview. The rest of the time, bids and offers should be "reasonably related" to the market price, he said.

While some market makers do business under obligations to trade and take the other side of customers' orders, much of the current market has come to rely upon proprietary trading firms whose business model is based upon rapidly buying and selling securities or derivatives, and who do so voluntarily.

Some of these proprietary trading firms have taken umbrage at the concept of being forced to trade no matter what the market climate, and potentially lose money.

Joe Ratterman, the chief executive of BATS Global Markets, warned Tuesday that there is a limit to how much these market makers can do to mitigate volatility.

"No firm is going to be willing to stand in front of a freight train and take losses to the point of extinction," Ratterman said at the hearing. BATS, a consortium-owned company, includes in its ownership group several major proprietary trading groups.

Ratterman said such traders may have valid reasons for pulling out of the market. Their risk controls may kick in and stop them from buying and selling, or the flow of price information from exchanges may slow to the point that they cannot trade on reliable information, he said.

The concept of circuit breakers--temporarily halting trade after a sharp up or down move in a stock's price--is a better response than trying to force big market makers from taking the brunt of major market runs, Ratterman said.

Matt Schrecengost, chief operating officer for Jump Trading LLC, said at the hearing that the array of different rules and trading venues that make up the U.S. equity market made it impossible for his firm to continue to trade U.S. stocks on May 6.

In futures, foreign exchange and bond markets, Schrecengost said, it was far easier to keep trading due to the simpler rules environment.

"The U.S. equity market is so complex normally that when you add into it a situation like May 6, it turns into complete confusion," he said. "If you are completely confused, it's not a good idea to keep trading."

-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117; jacob.bunge@dowjones.com
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