Are we a bunch of wimps?
Did we shirk our responsibility to the public?
On Monday, Oct. 29, and Tuesday, Oct. 30, U.S. stock markets were closed because of bad weather. As Hurricane Sandy barreled up the East Coast, a decision was made Sunday evening to close the markets after many banks and brokers expressed concerns for the safety of their people. As 90 mph gusts took down electric power and cell service for most of the region and an unprecedented tidal surge submerged the tunnels and streets of lower Manhattan, it looked like a wise decision.
Yet before the floodwaters of Sandy had fully receded, criticism began to pour in. Arthur Levitt, the former chairman of the SEC, was the most pointed, saying in a Bloomberg Radio interview on Oct. 30 that the decision to close the New York Stock Exchange was “a body blow that will really shake the image of that institution for a long time to come.”
Levitt followed up his comments with a scathing op-ed piece in The Wall Street Journal on Nov. 6 titled, “Why Couldn’t Wall Street Weather a Storm?” in which he blasted the industry for not being able to remain open during Sandy.
Levitt said that closing the markets unnecessarily would scare away investors. Our irresponsible actions would hurt our reputations, would hurt the economy, would hurt America itself. In his own words, “Trillions of dollars are at stake. The reputation of the U.S. as the world’s financial capital is at stake.”
Even though I was a participant in the decision to close the markets, I have to admit Levitt’s criticism made me feel good. After all, just a few years ago New York Times columnist Paul Krugman accused traders of having jobs that were “socially useless.”
I didn’t like being useless. But now, just a few short years later, I was learning that what we do is so critically important that taking off work for just a day or two was a travesty that could eventually cost the nation trillions of dollars. Embracing Levitt’s view of our societal importance, I decided it was our patriotic duty as market professionals to ensure the market is never again closed for any day other than the nine scheduled holidays we enjoy each year.
The first step toward bulletproof markets is for all the major players to have redundant computers and backup trading desk facilities set up outside of Manhattan. All the major U.S. market centers and banks already do this. But these backup sites are really designed for situations where a single participant gets knocked out due to, say, a building fire or a water-main break.
The backup plans were not designed for situations where the entire region’s communications infrastructure is blown out. The markets themselves are essentially a giant exercise in communication, with equity markets being the aggregate of millions of little negotiations between tens of thousands of people. Trading desks are not like a nuclear reactor that can and must keep operating even if entirely cut off from the outside world. A trader without a working phone or a functioning computer connection is as useless as Paul Krugman says we are.
But in 2012, communication is still a bit retro, in the sense that we still mostly rely on wires strung up on tall poles and cell towers that get damaged by high winds. So even if your backup site is functioning perfectly, is it useful if you can no longer talk with clients, senior management, market centers and regulators?
In a weather event as big and dangerous as Hurricane Sandy, where the entire communications grid is likely to be damaged, the only way to keep the markets functioning would be for the entire industry to be duplicated in another part of the country-say, in Chicago or Texas. But with an impending storm, airlines cancel flights, tourists and businesspeople jam the remaining planes, and it would be very tough to get large numbers of employees to a backup site outside of the region. It would also mean asking employees to abandon their homes, families and communities just as potential disaster approaches.
The more robust option would be for Wall Street firms and market centers to permanently move half their staff to a distant location, running what technologists call “hot/hot” centers, with two completely redundant trading floors that both run live every day. While this would work, it would be a major expense and a major economic shift for the nation’s economy. According to the Bureau of Labor and Statistics, there were 188,900 securities jobs in New York as of the end of 2011.
Before we start moving tens of thousands of people out of the region, let’s first understand how often problems like Sandy occur. It turns out the market has only missed an entire session due to weather five days in the past 100 years. There were two snow days (Jan. 3, 1948, and Feb. 10, 1969) and three hurricane days (Sept. 27, 1985, Oct. 29 and 30, 2012). In that time, the market was also closed another four days due to terrorism (Sept. 11-14, 2001) and once for a regional blackout (July 14, 1977).
Total all those up, and it comes to only six incidents and 10 trading days missed since World War I. That is for all closures due to both acts of God and acts of man.
That didn’t sound too bad to me. But as I continued my research, I realized a far larger risk than bad weather and bad people lay out there. On June 11, 2004, the markets shut down unexpectedly. The reason? The funeral of former president Ronald Reagan. Less than three years later, on Jan. 2, 2007, the heart of capitalism ground to a halt again. The reason this time? Gerald Ford’s funeral. Anyone remember if the market went up or down on April 26, 1995? Well, it did neither, because it was closed for the funeral of Richard Nixon. It turns out the market has closed 14 times in the past 100 years for funerals, making presidential expiration a far greater risk than hurricanes.
In the old days, the exchange officials were much more laid back about market closures than today. The market closed on July 21, 1969, to celebrate Neil Armstrong’s walk on the moon. It closed on June 13, 1927, to honor Charles Lindbergh’s flight across the Atlantic. And it opened late on Jan. 24, 1925, so members could watch a solar eclipse.
But don’t expect to get any time off for the next eclipse. Today’s market is much more fanatical about staying open, where it’s become controversial to shut down even for a hurricane. It stands to reason that if it is such a terrible thing for the market to close for a day or two for the 100-year storm, it must be equally bad to have it unexpectedly close for the death of a president.
And that is bad news for the economy. We currently have five living presidents out there, two of whom are 88 years old (Jimmy Carter and George H.W. Bush). And so I ask Mr. Levitt to join me in the only thing we can do to save America: Let us pray for the health of the five living men who have occupied the Oval Office. May they all be like Methuselah and live for 969 years.
After all, trillions of dollars are at stake.
Dan Mathisson is a columnist for Traders Magazine and the Head of U.S. Equity Trading for Credit Suisse. The opinions expressed in this column are entirely his own, and do not necessarily represent the opinions of the Credit Suisse Group.
