Circuit breakers

- on the equity markets Consultation paper

July 2006

This consultation paper is written by OMX The Nordic Exchange, Oslo Børs and Iceland Stock Exchange and is sent to all members of these exchanges.

Executive summary......................................................................................................... 3 Background.................................................................................................................... 4 Introduction to circuit breakers ......................................................................................... 5

Static price range ....................................................................................................................... 5 Dynamic price range ................................................................................................................... 5 Volatility interruptions during continuous trading............................................................................ 6 Volatility interruptions during call auctions..................................................................................... 6

Benchmark .................................................................................................................... 7 Deutsche Börse .......................................................................................................................... 7 London Stock Exchange .............................................................................................................. 7 Euronext ................................................................................................................................... 8 SWX Swiss Exchange .................................................................................................................. 8 Borsa Italiana ............................................................................................................................ 8 Irish Stock Exchange .................................................................................................................. 8 Other benchmarks ...................................................................................................................... 9

Current practise at OMX, Oslo Børs and Iceland Stock Exchange ............................................ 9 OMX Copenhagen ....................................................................................................................... 9 OMX Stockholm........................................................................................................................ 10 OMX Helsinki ........................................................................................................................... 10 Oslo Børs................................................................................................................................. 10 ICEX ....................................................................................................................................... 11

Academic testimony .......................................................................................................11 Proposal for circuit breakers and trading safeguards............................................................13

Reference prices....................................................................................................................... 13 Stages in and length of the interruption ...................................................................................... 13 Segmentation .......................................................................................................................... 14 Width of price ranges ................................................................................................................ 14 Penny shares ........................................................................................................................... 15 Fast markets............................................................................................................................ 16 Publication of the static and dynamic range ................................................................................. 16 When circuit breakers are triggered ............................................................................................ 16 Trading safeguards ................................................................................................................... 17 Forced cancellation of trades...................................................................................................... 17

Effects on the markets....................................................................................................18 OMX ....................................................................................................................................... 18 ICEX ....................................................................................................................................... 18

Questionnaire................................................................................................................20

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Executive summary

OMX The Nordic Exchange, Oslo Børs and Iceland Stock Exchange are proposing to implement circuit breakers and trading safeguards on the equity markets in the SAXESS trading system. A circuit breaker interrupts matching when the price movements in a security become relatively large. The purpose is usually to give the market participants a few minutes to evaluate any new information, reconsider their interests or remove any erroneous orders. We propose to implement circuit breakers in September 2007. A circuit breaker has two types of reference prices: a static price and a dynamic price. The static reference price is the last auction price and the dynamic price is the last traded price. If an incoming order would result in a trade that deviate sufficiently from the reference price it will trigger a circuit breaker. When a circuit breaker is triggered the system will change the state of the order book to pre-call for 30 seconds followed by an auction state for three minutes plus random zero to 30 seconds. If the new equilibrium price is outside the static price range the auction state will be extended for 90 seconds plus random zero to 30 seconds. OMX proposes the following price ranges: A static range of:

• 10% for blue chip and investment funds/ETFs • 15% for other shares and First North • 40% for penny shares

A dynamic range of:

• 2% for blue chip and investment funds/ETFs • 5% for other shares and First North • 20% for penny shares

Oslo Børs proposes the following price ranges: Oslo Børs also proposes the suggestions and limits stated in the OMX proposal. However since there has not been made a study on the effects on the Oslo market, Oslo Børs reserves the right to change these limits after such a study has been made. Iceland Stock Exchange (ICEX) proposes the following price ranges: ICEX propose only to use a dynamic price range of:

• 5% for blue chip (ICEX15) • 25% for other shares

Furthermore OMX, Oslo Børs and ICEX propose to implement trading safeguards to use simultaneously with circuit breakers. Safeguards can be implemented in May 2007 or maybe already as of September 2006. A safeguard rejects orders that deviate significantly from a reference price from entering the order book. As reference price we will use the last traded price. Compared to circuit breakers the price range for safeguards will be wider and the purpose of safeguards is primarily to avoid erroneous order entries. The price ranges for trading safeguards have not yet been decided.

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Background

Sometimes stock markets experience sudden drops or increases of a share price that can be difficult to explain. Other times a price movement is caused by a company announcement. Nevertheless, when volatility increases, the market will experience increased uncertainty as well. Several incidents have emerged since Black Monday in October 1987 – not least in the last couple of years – where the prices in the order books have made large jumps causing a lot of problems and uncertainty. For example, in December 2005 on the exchange in Tokyo, Japan, an erroneous trade had big consequences for a member and for the market as a whole. The incident led to increased trading activity and uncertainty, and had a major impact on the price and volume which caused a system breakdown. The overall trust and confidence to the market was weakened. The reason for these incidents can be sudden changes in expectations to a share price or it may be caused by manual erroneous order entries. These sudden and significant price movements may trigger stop loss orders and other algorithmic trading that can have a negative impact on the price stability. Stop loss orders are not an order type offered by the SAXESS trading system but is a facility offered by some members to end clients. When the price drops to a pre-determined level, the stop loss order is automatically triggered “in-house” and entered into SAXESS as an ordinary limit order. Stop loss orders are generally not a problem but they can cause a problem specifically in cases were the order book is not very liquid or when triggered by erroneous trades. Furthermore stop loss orders can start a chain reaction where one order moves the price further down and then triggers other stop loss orders. When this happens the price may recover but after a period of uncertainty. Also algorithmic trading that is triggered by arbitrage between A and B shares, warrants, index arbitrage etc. can influence the volatility. This type of behaviour may have a negative impact on the credibility of the market and may have economic impact on the market participants. The volume of algorithmic trading, black box trading, special order types like stop loss orders and arbitrage trading is increasing on all the exchanges. The amount of trades of these types is expected to escalate if no further actions are taken. A step to decrease the uncertainty is to implement circuit breakers – a standard functionality on several European stock exchanges today.

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Introduction to circuit breakers

The general idea is to establish a reference price in all order books and then allow trades that have been matched at a price within a pre determined range from the reference price. The setting and methodology of the reference price is crucial to achieve the desired effect. A circuit breaker interrupts matching when the price movements in a security become relatively large. The purpose is usually to give the market participants a few minutes to evaluate any new information, reconsider their interests or remove any erroneous orders that might have triggered the interruption. Often the matching interruption ends with a call auction so that the market determines a new price level for the relevant security. The boundaries for price movements that trigger a circuit breaker are usually measured in two different ways: a) A static price range b) A dynamic price range

Opening call Continuous trading Closing call

Static price range Dynamic

price range Opening call price price

Latest traded price

Maximum price deviation

Closing Price t-1

Closing call price

Static price range

The static price range is determined by a predetermined range (e.g. 10%) around a reference price in each order book. For the static price range the last auction price is usually used as the reference price. In the opening auction the closing price from the previous day is used as a reference price for the static price range. During continuous trading the opening call price is used as reference price. If there is any call auction during the day, this will determine a new reference price. The static price range can be active both during call auctions and continuous trading. This circuit breaker is usually triggered by relatively large price movements over the trading day.

Dynamic price range

The dynamic price range is determined by a predetermined range (e.g. 5%) around a reference price in each order book. In contradiction to the static price range the reference price in a dynamic price range is usually determined by the last trade in the order book. Hence it is continuously updated

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during continuous trading and even by call auctions. The dynamic price range is narrower than the static price range. The dynamic price range is only active during continuous trading – hence not during call auctions. This circuit breaker is triggered by relatively big price movements from one trade to the next.

Volatility interruptions during continuous trading

The continuous trading is interrupted by a volatility interruption whenever the potential execution price of an order lies outside the dynamic and/or the static price range. Incoming orders are partially executed until the next potential execution price leaves the corridor. A volatility interruption triggers a change in trading form (state): from continuous trading to pre-call followed by a call auction. Any un-executed part of a limit order triggering a circuit breaker will be carried on and added to the order book in the auction state. ‘Fill or kill’ orders can not trigger a circuit breaker. If the price of a ‘fill or kill’ order is out side the price range it will be rejected in full and hence not have any influence on the continuous trading.

Volatility interruptions during call auctions

A volatility interruption during call auctions is initiated if the indicative auction price is outside the static price range. This initiates a limited extension of the call phase allowing market participants to enter new orders as well as to modify or delete orders in the order book.

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Benchmark

The benchmark analysis covers: Deutsche Börse, London Stock Exchange, Euronext, Swiss Exchange, Borsa Italiana and Irish Stock Exchange. Thresholds

Static price Thresholds

Dynamic price Duration

Halt/auction Exchange Price range Reference

price Price range Reference

price

Deutsche Börse

Not published Last auction price

Not published Last traded price

Interruption for 2 minutes

London Stock Exchange

- - +/- 5 % +/- 25 %

Last traded price

Interruption for 5 minutes

Euronext +/- 10 % Last auction price

+/- 2 % +/- 5 %

Last traded price

Interruption for 4 minutes

Swiss Exchange

- - +/- 2 % +/- 25 %

Last traded price

Interruption 15 minutes (5 minutes)

Borsa Italiana

+/- 10 % +/- 5 % Weighted average price

Interruption for 5 minutes

Irish Stock Exchange

+/- 6 or 12% +/- 20 or 24% 1)

Last auction price

+/- 3 or 6% +/- 10 or 12% 1)

Last traded price

Minimum duration

1) See Market Model for the Electronic Trading System of the Irish Stock Exchange: ISE Xetra®

Deutsche Börse

The Xetra trading system contains circuit breakers that are volatility interruptions and can be initiated by deviation from a static or a dynamic price range. The thresholds for the reference prices are not published. When a sufficient price movement triggers a circuit breaker the trading state changes directly from continuous trading to an auction state. No halt is initiated and iceberg orders participate in the auction with their full volume. The call phase ends randomly, but if the new auction price is outside the previous price range the auction is extended until the volatility interruption is terminated manually. The call phase can only be extended once.

London Stock Exchange

London Stock Exchange has implemented price monitoring which triggers a temporary suspension of order book trading when prices move beyond defined thresholds. If the price tolerance levels are reached or breached during continuous trading the trading will be suspended and an Automatic Execution Suspension Period (‘AESP’) will occur resulting in an intra-day auction. The auction call will last for five minutes with random end periods.

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The reference price at London Stock Exchange is the last paid price generated automatically in the system. The reference price can also be set manually if required. The reference price at the start of each trading day is set as the last automatically executed trade – normally the closing price from the previous day. London Stock Exchange is only using a dynamic reference price and the price tolerance is set dependant on the segment. For the most traded securities the threshold is 5% deviation from the reference price and 25% for the less liquid. If a fill or kill order is outside the reference price range the order is rejected and no interruption is initiated.

Euronext

If circuit breakers are triggered they may cause a reservation or a warning if the price of an order is deviating from the reference price range. The static reference price is the auction price or the closing price for the previous trading day. The static price range is +/- 10%. The dynamic reference price is re-adjusted during continuous trading and is set as the last automatic trade. The dynamic price range is +/- 2% for the most traded shares and +/- 5% for all other shares. During this interruption it is possible to delete orders, enter new orders and modify orders. The re-opening of an order book is done by an auction.

SWX Swiss Exchange

Only a dynamic reference price is used. If the price deviates by 2% or more from the reference price (last traded price), there will be an interruption of 15 minutes. During this break it is possible to delete orders, enter new orders and modify orders. The order book opens in an auction and a new reference price is calculated. For shares with a price less than CHF 10 the allowed deviation is set to 25% which will lead to an interruption of only 5 minutes. For foreign equities the allowed deviation is 2% or more, but the break is only 5 minutes.

Borsa Italiana

There is an automatic control of the trading with a maximum variation of +/- 10% with respect to the control price (static price) and a maximum variation of +/- 5% from the dynamic reference price. The dynamic reference price is calculated as a weighted average price of the ten last per cent of the quantity traded.

Irish Stock Exchange

Irish Stock Exchange has two types of interruptions to increase price stability: Volatility interruptions that trigger a halt followed by an auction in an order book and market order interruptions that reject orders in an auction.

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The thresholds for the reference price are set according to a price range table. Penny shares have a larger threshold than larger shares. Further, the shares are ordered into two liquidity classes. The thresholds are in Euro cents for penny shares and with a percentage deviation for other shares according to share price and liquidity. When a circuit breaker is triggered an auction is set for a minimum duration and the auction ends within a random period of time. If no new equilibrium price is set, the auction phase will be extended until it is manually ended.

Other benchmarks

Some circuit breakers are triggered if an index falls by e.g. 10%. For example, if the Dow Jones Industrial Average falls by 10%, the NYSE might halt market trading for one hour.

Current practise at OMX, Oslo Børs and Iceland Stock Exchange

None of the OMX exchanges is currently using circuit breakers. OMX Helsinki uses safeguards which prevent orders with strongly deviating prices to be entered in the order books. OMX Stockholm, OMX Copenhagen and OMX Helsinki all have different practices for cancellation of erroneous trades. Market Surveillance at OMX is in continuous dialogue with the members to reduce risk of erroneous trades. The members have been recommended to set up internal filters to catch orders with prices strongly deviating from the market price. Written guidelines for the OMX cancellation policies are expected to be published during the summer 2006. The guidelines will be used for the Stockholm and Copenhagen markets. The guidelines are based on the standard procedure for forced cancellation used in Stockholm and are in line with Norex Member Rules 5.7.3.

OMX Copenhagen

OMX Copenhagen has a matching halt in an order book every time a potentially price sensitive company announcement is received. After halting the relevant order book(s) the announcement is immediately released to the market. The halt is for 5 minutes and gives the market participants time to remove any orders they have in the affected order book(s). Furthermore they get time to assess the consequences of the announcement for the price of the security. Since 25 April 2006 the matching halt has been ending with a call auction of between 30 and 90 seconds. During the matching halt new orders can not be placed and existing orders can not be changed. However it is possible to delete orders. During the auction phase it is also possible to place new orders and change existing orders. The auction is an open auction, where the accumulated volumes at the five best price levels are visible – market by level. This also includes hidden volumes – so-called iceberg orders. To avoid disclosure of orders with a hidden volume, dealers may, when placing an order, decide that the order shall be valid until the start of “next call”.

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Trades executed outside Saxess – manual trades or off-exchange trades – may be reported as usually during the matching halt. As a consequence of the Transparency Directive OMX Copenhagen might not be able to uphold the use of matching halt after company announcements. The Transparency Directive will enter into effect in January 2007.

OMX Stockholm

OMX Stockholm has been using forced cancellation since late 90’s, so that Market Surveillance can forcibly cancel erroneous trades. This way the price uncertainty is reduced and the market will much faster be back to trading at the right price level. Furthermore the workload for member firms is reduced since they do not have to take a dialogue with Market Surveillance and await a similar dialogue between Market Surveillance and the counterpart in the trade. OMX Stockholm does not have matching halts in connection with company announcements like OMX Copenhagen.

OMX Helsinki

OMX Helsinki has been using trading safeguards since 1987. Trading safeguards define the maximum acceptable percentage deviation of the order price from a reference price defined by the previous day’s closing price. Orders outside this range are rejected to entering the order book. The default static price deviation range for equities and ETFs is +/- 15%, for other cash market instruments +/- 50% and for bonds +/- 20%. The acceptable percentage deviation as well as the reference price for an individual security can be changed by Market Surveillance on intraday basis. Orders are validated against the trading safeguards at the beginning of the trading day. If an order fails the validation it is cancelled. No new intraday checks are performed for orders already entered into the order book when the price range or the reference price is changed. OMX Helsinki does not have matching halts in connection with company announcements.

Oslo Børs

Oslo Børs uses matching halts similar as OMX Copenhagen. Trading Surveillance assess all important announcements before releasing them to the market to decide whether or not to use a matching halt in connection with the release of the announcement. This halt is usually only for a few minutes with a call auction of 5 minutes opening the trading again. The same rules for order deletion and entries as OMX Copenhagen applies in Oslo, this is also valid for the information market participants get from the auction period. Also off exchange trades can be reported during the matching halt. Oslo Børs also uses matching halts when there are significant price movements where the Trading Surveillance either suspects a leakage of price sensitive information, or where the trading pattern is abnormal and an investigation of the trading pattern is necessary. The Trading Surveillance decides when a matching halt for this reason shall be imposed. Oslo Børs normally halts trading with matching halts over 300 times a year, where 90% of this is due to release of price sensitive company announcements.

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Oslo Børs, as OMX Stockholm, uses forced cancellation in situations where erroneous trades, breaches of rules and regulations or system failures have taken place. Oslo issued a circular regarding this in 2002, which on the issue of forced cancellation is similar to the note which is currently being discussed in NOREX. Oslo Børs uses forced cancellation at least once a month.

ICEX

Iceland Stock Exchange (ICEX) uses matching halt at the order book level. When interim and annual financial statements and announcements regarding companies are published in the ICEX News System, the appropriate order book is set to a matching halt for 10 minutes. When AGM’s or shareholder meetings take place the appropriate order book is set to a matching halt and released five minutes after the results from the meeting have been published in ICEX News System. Matching halt is also used at ICEX if there are significant price movements and leakage of information to the market is suspected. ICEX has only halted trading for this reason on a few occasions. ICEX uses similar principles of forced cancellation as OMX Stockholm. The principles of forced cancellation have only been needed on rare occasions in the past. ICEX is taking part in discussions at the NOREX level on cancellation policies and expects to adopt guidelines on forced cancellations identical to the ones planned for OMX Stockholm and OMX Copenhagen.

Academic testimony

Researchers and regulators have not reached consensus on whether circuit breakers provide a moderating influence. American exchanges instituted circuit breakers in 1988 in an effort to protect investors and markets in the event of a future extreme market adjustment. Opponents contend that mandated trading halts impede the natural movement of stock prices and introduce unnecessary and artificial barriers1. One might expect that circuit breakers would reduce volatility in shares, since relatively big price movements are followed by a matching halt, giving investors time to evaluate any new information and reconsider their interests. However various studies (e.g. by Eskandar A. Tooma and Maged S. Sourial2) find that circuit breakers fail to dampen volatility in the market. Their results imply that the circuit breakers contributed in increasing investors’ risk aversion, reduction of investors’ welfare and added distortions to the market made it impossible for efficient pricing. Recep Bildik and Selim Elekdag3 argue that circuit breakers have two attributes to control volatility: first, they establish price constraints, second, they provide time for rational reassessment during times of panic trading. Supposedly, it prevents freefall of prices, prevents wild swings and provides

1 ‘An experimental study of circuit breakers: The effects of mandated market closures and temporary halts on market behavior’, by Lucy F. Ackert, Bryan Church and Narayanan Jayaraman, Journal of Financial Markets, 4/2001 2 ‘Modelling the Egyptian Stock Market volatility pre- and post circuit breaker’, by Eskandar A. Tooma and Maged S. Sourial 3 ’Effects of price limits on volatility: Evidence from the Istanbul Stock Exchange’, by Recep Bildik and Selim Elekdag,

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time-out period to cool-off. They find however that an increase in the price limit (range) in 1994 has decreased volatility on Istanbul Stock Exchange. Ackers, Church and Jayaraman4 find that circuit breakers perform no useful function in their experimental asset markets. Their results indicate that circuit breakers fail to temper unwarranted price movements in periods without private information. Investors appear to mistakenly infer that others possess private information, causing prices to move away from fundamental value. They find that a temporary halt leads to a greater price deviation from the fundamental value compared to market closure, since the investors have to make decisions under time pressure. Lucy F. Ackert, Bryan Church and Narayanan Jayaraman examine the effects of market closure and temporary halts on trading and pricing. They find that the absolute deviation in price from the expected price is not significantly different across regulatory regimes (market closure, temporary halt or no interruption). In their analysis circuit breakers affect trading activity in a significant way. In particular, market participants accelerate their trade if a trading interruption is imminent. While no real downside risk to circuit breakers are suggested, the benefits are also not apparent since they do not improve pricing efficiency. Michael A. Goldstein and Kenneth A. Kavajecz’s5 results suggest that uncertainty associated with the disruption of continuous trading markets caused by market closures is larger than the uncertainty associated with a sharp decline in market prices during an open market.

4 ’Circuit Breakers with uncertainty about the presence of informed agents: I know what you know… I think’, by Lucy F. Ackert, Bryan K. Church and Narayanan Jayaraman, Working Paper 2002-25, December 2002 5 ’Trading strategies during circuit breakers and extreme market movements’, by Michael A. Goldstein and Kenneth A. Kavajecz, Journal of Financial Markets, 7/2004

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Proposal for circuit breakers and trading safeguards

OMX and Oslo Børs recommend implementation of circuit breakers – including both a static and a dynamic range. ICEX proposes implementation of circuit breakers using only dynamic price range. The purpose of implementing circuit breakers is to reduce uncertainty in volatile markets or in connection with company announcements. Circuit breakers used simultaneously with safeguards are also expected to significantly reduce the number of erroneous trades at strongly deviating prices, and any following stop loss orders and forced cancellation of trades. These erroneous trades do not only cause extra work and costs for the involved parties but also increases uncertainty regarding the share price. OMX, Oslo Børs and Iceland Stock Exchange propose that circuit breakers will apply to the following markets:

• Listed Equities • Investment Funds/Exchange Traded Funds (ETFs) • First North

The circuit breakers will not apply for warrants and equity rights. Beyond the question whether to implement circuit breakers or not, it has to be defined how these should function if implemented. Below is the proposal in details:

Reference prices

For the static price range OMX and Oslo Børs will use the last auction price as reference price. This assures that the price range is updated in connection with major price movements and do not trigger too many interruptions. If however the previous day did not have any trades in the closing auction, OMX and Oslo Børs will in stead use last traded price until an auction price is available. This is because the last traded price is expected to be more guiding than for instance previous days opening call price. The dynamic range will be updated by last traded price – both trades generated in the SAXESS system and reported off-exchange trades updating the last paid. This of course includes trades during continuous trading as well as matched trades in a call auction.

Stages in and length of the interruption

The interruption will start with a 30 seconds of pre-call state meaning that orders in the order book will be hidden (closed call). During the pre-call state orders will not be matched in the Saxess trading system. After the pre-call state the interruption will continue with a call auction (CLIN) for three minutes plus random zero to 30 seconds ending with an un-cross – price determination and matching of orders. This call state is an open call auction where the orders in the order book are shown as Market by level (MBL). In both pre-call and Call interaction it will be possible to enter, modify or delete orders as well as suspend and activate orders. When the call auction begins the total volume at the five best price levels will be exposed including hidden volume (iceberg orders). The volume will be shown as market by level, meaning total

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volume at each of these price levels. It will not be possible to see the size of the individual orders. As mentioned earlier it is possible to avoid disclosure of orders with hidden volume, when placing an order, by deciding that the order shall be valid until the start of “next call”. Alternatively the pre-call state can be used to remove orders with hidden volume. The interruption may be used to evaluate any new information and reconsider ones interests. Reporting of trades will not be possible during the interruption. OMX, Oslo Børs and Iceland Stock Exchange propose that trades that are prevented being reported due to a circuit breaker interruption should be reported just after the order book change state to continuous trading. The reporting rules and Norex Member Rules (5.6.19) will be changed in line with the implementation of circuit breakers. The interruption could in general be set shorter, but we estimate that at least a few minutes are needed to evaluate any new information. Furthermore market surveillance may need time to contact members regarding deviating orders etc. If the interruption is too short, orders will not be entered in the call auction making the price less sharp. With a less sharp price – or no price at all – from the call auction there is a great risk of triggering another circuit breaker shortly after. These repeating interruptions could be disturbing and harmful for the trading and the liquidity.

Segmentation

Not all shares should have the same static and dynamic price ranges, since there is a significant difference in liquidity between the different shares. An appropriate price range for a very liquid blue chip share will not be appropriate for a less liquid share with a wider spread. One possibility could be to use the Nordic List (Large Cap, Mid Cap and Small Cap) as segmentation. However the liquidity differs a lot within these groups, so it can be difficult to have the same price ranges for both very liquid and less liquid Small Cap companies. OMX, Oslo Børs and Iceland Stock Exchange proposes that the blue chip indices (OMXC20, OMXH25, OMXS30, OBX and ICEX15) are used as one segment and all other shares listed at OMX Copenhagen, OMX Helsinki, OMX Stockholm, Oslo Børs and Iceland Stock Exchange are used as another segment. Furthermore Investment Funds and ETFs and shares at First North can be separate segments with separate parameters. OMX, Oslo Børs and ICEX reserve the right to use another segmentation if we conclude that it will be more beneficial for the individual order books e.g. if some order books are triggering more circuit breakers than appropriate.

Width of price ranges

It is important to stress that OMX, Oslo Børs and Iceland Stock Exchange do not want too many interruptions. The aim is to find a range that will trigger a circuit breaker when necessary but not more than that. If the range is too wide it will not trigger when needed, and if it is too narrow it will trigger far too often without sufficient reason and disturb the trading instead. OMX and Oslo Børs proposes that static range will be reference price +/- 10% for blue chip shares (OMXC20, OMXH25, OMXS30 and OBX) as well as Investment Funds. Investment funds are included in this segment because they are expected to be traded around intrinsic value. We propose a

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static price range for all other shares and First North with a reference price of +/- 15%. The reason for a wider range for this segment is the anticipated lower liquidity in these order books. Iceland Stock Exchange proposes not to use a static reference price. For the dynamic range OMX and Oslo Børs proposes the following thresholds:

Reference price Segment +/- 2% Blue chip shares (OMXC20, OMXH25, OMXS30 and OBX) +/- 2% Investment funds (ETFs) +/- 5% All other listed shares +/- 5% First North

Iceland Stock Exchange proposes only to use a dynamic price range with the following thresholds:

Reference price Segment +/- 5% Blue chip shares (ICEX-15)

+/- 25% All other listed shares Since Iceland Stock Exchange is not proposing a static price range, circuit breakers will not be triggered during call auctions. Apart from not using a static reference price, the general setup for implementing circuit breakers at ICEX is the same as the OMX and Oslo Børs proposal. OMX, Oslo Børs and ICEX reserve the right to to change the thresholds for the reference prices if we conclude that it will be more beneficial for the segments e.g. if some order books are triggering more circuit breakers than appropriate.

Penny shares

A dynamic range of 2% or 5% can be problematic for shares trading at low absolute prices – so-called penny shares – because the tick size may result in a spread of several percents. Furthermore several penny shares have a lower liquidity and a spread of several ticks. Hence the circuit breaker would be triggered at almost any price change. To hinder this OMX and Oslo Børs proposes special static and dynamic ranges for penny shares. Static price range for listed shares, First North, Investment Funds and ETFs: +/- 40% - however never less than 0.15 EUR/DKK/SEK/NOK. Dynamic price range for listed shares, First North, Investment Funds and ETFs: +/- 20% - however never less than 0.05 EUR/DKK/SEK/NOK. The definition of a penny share is an instrument with an absolute price of less than 5 DKK/SEK/NOK or 0.50 EUR. For Iceland Stock Exchange the 25% threshold includes penny shares. A circuit breaker can, however, never be triggered by an absolute price change of less than 0.05 (in the currency of the order book) even if it exceeds 25%.

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Fast markets

While circuit breakers are volatility interruptions for individual order books, it is also necessary to have focus on volatility on the market as a whole. Some European exchanges have a rule for expanding the thresholds when a “fast market” occurs. A “fast market” is a market with a significant volatility of prices. The high volatility is caused by either technical, political or economic reasons and the entire market acts with uncertainty in the price determination. But there is no straight definition of a “fast market” and hence it is the exchanges that decide whether there is a “fast market” and will inform the market participants. We propose that when the market surveillance on each exchange decides the market to be a “fast market” the circuit breaker thresholds will be doubled.

Publication of the static and dynamic range

At Deutche Börse they have chosen not to publish the size/width of the static and dynamic ranges. This means that the market participants don’t know when a circuit breaker is trigged and hence they can not speculate in the triggering of a circuit breaker. However the market participants can learn by observing the triggering of circuit breakers. On the other hand it can be beneficial for the individual market participant to know if a circuit breaker is getting closer and is about to be triggered. The other European exchanges with circuit breakers have chosen to publish the static and dynamic ranges. OMX, Oslo Børs and Iceland Stock Exchange propose that the static and dynamic ranges are published to increase the transparency. Unexpected interruptions could be disturbing for the traders, and the ranges would somewhat be revealed sooner or later. We do not expect traders to take advantage of their knowledge of the trading ranges since all orders should reflect the current market value according to Norex Member Rules 4.6.1.

When circuit breakers are triggered

OMX, Oslo Børs and Iceland Stock Exchange propose that circuit breakers do not apply during the opening call. We believe that any new information after the markets are closed will be included in the price of new orders entered in the opening call. We expect the current 15 minutes to be sufficient time to calculate the opening equilibrium price. Circuit breakers will apply during intraday auctions and closing auctions. If the price in the call auction ends on or outside the static range the auction will be extended for 90 seconds plus random zero to 30 seconds. It will however only be extended once. For the closing auction this may delay the time of closing, but expectedly the delay will be insignificant. The dynamic range does not apply during call auctions. A circuit breaker will be triggered during continuous trading when an entered order in Saxess will lead to a trade on or outside the static or dynamic range. The triggering order will be matched up to the range but not with orders on or outside the range. The unmatched part of the order will remain in the order book. ‘Fill or Kill’ orders are an exception. This type of orders will never trigger a circuit breaker. If the price on a ‘Fill or Kill’ order is outside the statistic or dynamic range it will be rejected leading to no trades.

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‘Fill and Kill’ orders with a limit price outside the dynamic or static range will be matched with orders within the price range but not with orders on or outside the range. The unexecuted part of the ‘fill and kill’ order will trigger a circuit breaker, but will not be registered in the order book. The triggering of a circuit breaker in a security does not lead to circuit breakers in other securities e.g. shares of same company or derivatives.

Trading safeguards

Furthermore OMX, Oslo Børs and ICEX recommends that also trading safeguards (as in OMX Helsinki today) will be implemented and used simultaneously with circuit breakers. A safeguard rejects orders that deviate significantly from a reference price. OMX, Oslo Børs and ICEX propose to use last traded price as reference price. Compared to circuit breakers the price range for safeguards are wider and the purpose of safeguards is primarily to avoid erroneous order entries. OMX, Oslo Børs and ICEX propose that safeguards are implemented as soon a spossible.

Forced cancellation of trades

If it is decided to implement circuit breakers and trading safeguards we still recommend our members to have a front end filter or internal safeguards to avoid erroneous order inputs. During the summer 2006 the Norex Forced Cancellation Guidelines are expected to be published6. The written guidelines are in line with Norex Member Rules 5.7.3. When the Exchange initiates forced cancellation, the cancellation normally does not include the trades which are considered to be at the market price. Trades at the spread or close to spread (3rd level of the order book prior to the Erroneous Transaction) will normally not be cancelled, if there is no extraordinary reason to consider this differently. All trades deviating more than 10 % from last entered order updating the spread will normally be cancelled, if there is no extraordinary reason to consider this differently. If circuit breakers and trading safeguards are implemented the definition of cancellation thresholds will be changed in line with the thresholds for the reference prices of the circuit breaker. We expect that the number of erroneous trades and other trades that needs to be cancelled will decline significantly. But it will still be necessary to have guidelines for cancellation of trades. There still might be incidents that demand the revised forced cancellation guidelines. In situations when the market is trading with a clear misunderstanding of information, e.g. if the market is uncertain of an ex-date for extraordinary dividends or if a member has failed to cancel erroneous orders causing the interruption.. If circuit breakers or trading safeguards are implemented orders might be rejected. Norex Member Rules 4.6.3 allows the exchanges to reject or cancel orders that are clearly deviating from the market price. Also orders with condition fill or kill that exceeds the price threshold will be rejected in full.

6 The guidelines may not apply for all Norex Exchanges

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Effects on the markets

OMX

OMX has analysed and is still analysing the consequences of the proposed price ranges and tested other price ranges as well. We have analysed the trading for three normal weeks (week 5, 10 and 17 in 2006) in a setup with circuit breakers. Hence we have not yet deeply analysed particularly active or unusual periods with high volatility or many company announcements. We should expect that more circuit breakers are triggered in such active or volatile periods. This is one of the purposes of the circuit breakers: to give a time out and launch an auction to reduce the price uncertainty. Circuit breakers because of the static price range will be relatively rare. In Copenhagen and Helsinki we can expect around one in two days for each country. In Stockholm two per day should be expected. Of Swedish circuit breakers 75% are from ‘Other shares’, 18% from penny shares and the remaining 7% from blue chips. By far the most circuit breakers will be triggered because of the dynamic range. The blue chip range of +/- 2% will trigger a break once a week in Copenhagen (20 shares corresponding to once in 100 days for each share), twice a week in Stockholm (30 shares corresponding to once in 75 days for each share) and 4 times a week in Helsinki (25 shares corresponding to once in 31 days for each share). A range of +/- 20% for penny shares will only rarely lead to a circuit breaker in Copenhagen or Helsinki (no observations in analysed three weeks) and about once a week in Stockholm (approx. 25 shares corresponding to once in 125 days for each share). A range of +/- 5% for other shares will trigger circuit breakers twice a day in Helsinki, four times a day in Copenhagen and six times a day in Stockholm. On average this corresponds to once in 40 days for others shares at Copenhagen and Stockholm and once in 70 days for other shares at Helsinki. Each share traded at First North (also +/- 5%) will be interrupted about once in 15 days. Investment funds in Copenhagen will trigger around five circuit breakers a day with a range of +/- 2% corresponding to once in 60 days for each fund.

ICEX

ICEX has analysed the potential effect of introducing circuit breakers based on trading data for the first half of 2006. The analysis indicates that the proposed dynamic price range of +/- 5% for ICEX-15 companies would have triggered circuit breakers on five occasions (in four different order books) during this period. A clear trader error in order placement was responsible for one of these instances. The threshold of +/-25% for “other” shares would, on the other hand, not have resulted in any circuit breakers. ICEX has also investigated the likely impact of other dynamic price ranges in order to help members formulate an opinion on the appropriate threshold levels. If the dynamic range is narrowed to +/-4% for ICEX-15 companies, the analysis indicates that the number of circuit breakers would more than double. Using a narrower range of +/- 15% for other companies would have triggered circuit breakers twice during the first half of 2006.

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Finally, if ICEX were to adopt the dynamic range proposed for OMX (+/-2% for ICEX-15 companies and +/-5% for other companies), the data indicate that the number of circuit breakers would be far greater than ICEX considers desirable. The simulations for the first half of this year suggest that circuit breakers would have been triggered between 150 and 200 times for ICEX-15 companies and between 10 and 15 times for other companies.

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Questionnaire

Company:

Contact person:

Contact details: Member of the following exchanges Copenhagen Stock Exchange Oslo Børs Stockholm Stock Exchange Iceland Stock Exchange Helsinki Stock Exchange

To be able to compile and evaluate all answers on circuit breakers in an efficient way, we would appreciate if all members could take the time to give this topic some attention. Please note that we would like the feedback to reflect the member firms’ collective view rather than a specific person’s personal view. Generally, we will follow our members’ collective view. However, OMX, Oslo Børs and ICEX still reserves a final decision for exceptional circumstances. We need your answer no later than 21 August. If you are indifferent about some questions please leave these blank. All answers will be distributed to all members unless you prefer your answers to be confidential. Our answers are for internal use only 1. Use of circuit breakers on the equity market Do you support the implementation of circuit breakers? Yes, we support the implementation of circuit breakers No, we do not support implementation of circuit breakers

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2. Trading Safeguards Do you support the implementation of trading safeguards? Yes, we support the implementation of trading safeguards * No, we do not support implementation of trading safeguards * a new proposal for the safeguards thresholds will be distributed to all members If the members support the use of trading safeguards, the functionality will be implemented as soon as possible. Comments:

3. Fast markets If circuit breakers are preferred - the exchange can consider a market to be a “fast market”. Under these conditions the static and dynamic ranges are proposed to be doubled. Do you support expansion of thresholds during “fast markets”? Yes, the thresholds should be doubled No, we prefer the same thresholds as under normal conditions 4. Circuit breakers in opening auction OMX and Oslo Børs propose that circuit breakers do not apply in opening auction. Do you support this proposal or do you prefer circuit breakers in the opening auction using static price range. Yes, we support no circuit breakers in the opening auction No, we prefer that circuit breakers apply in the opening auction Since ICEX does not propose the use of a static reference price, there will be no circuit breakers in the opening auction on ICEX.

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5. Comments to the above answers or other comments

If you have any questions or want to set up a meeting to discuss these topics with the exchange please do not hesitate to contact your Account Manager within OMX, Oslo Børs or Iceland Stock Exchange. Please send your answer by e-mail no later than Monday 21 August 2006 to: Account Manager, Jakob Kaule Poulsen E-mail: jakob.kaule@omxgroup.com Tel: +45 3377 0384

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