To close or not to close?
That was the question the major US stock exchanges faced in March when the United States, faced with a blossoming threat from the novel coronavirus, shuttered most businesses and stay-at-home orders were enacted. Stay-at-home also applied to Wall Street and its traders, floor brokers, specialists and middle/back office workers. No one was exactly sure how the markets would react to such a drastic change of business model and some pundits and officials wondered if the stock exchanges should halt operations and cease trading.
Some global exchanges did close, such as the Philippines Stock Exchange. But the US domiciled exchanges did not. They reassured investors, traders and the government would stay open, maintain liquidity and allow investors unfettered access to their money. Both CBOE Global Markets and the New York Stock Exchange closed their physical trading floors but went to a fully electronic trading model.
In speaking at the Equity Markets and the COVID-19 Pandemic webinar yesterday hosted by by BakerHostetler and the Equity Markets Association, officials from Nasdaq, NYSE and stated that staying open, despite some pleas and discussion to the contrary, were essential to maintaining investor confidence and proper market functioning.
Tal Cohen, Executive Vice President and Head of North American Markets at Nasdaq, set the tone by noting that despite a retracement from the hyper wide spreads and volatility seen during the March trading timeframe that time was just a market stress – both like and unlike others seen.
“Markets functioned through the entirety of that time and functioned extremely well,” Cohen said during the webinar. “The market has been part of the solution during this recent stress, unlike back in 2008 and 2009 when it was part of the problem. Everything functioned as they should – the entire ecosystem – from the TRF, to the brokers, post trade facilities and SIPs.”
Michael Blaugrund, Chief Operating Officer, NYSE, agreed andd said that market quality didn’t suffer during the March trading frenzy and market quality did not suffer – a testament to the trading markets and affirmation to keeping them open.
“In the early days of March it was a tremendous test for the infrastructure as conditions were unprecedented since the 1930s,” Blaugrund began. “You had investor uncertainty of value of assets. But the system (trading ecosystem) was predictable, stable and resilient and well beyond the exchanges – but buyside and sellside too. It was well understood that a high capacity National Market System was crucial to restoring investor confidence. And it did.”
Cboe Global Markets’ Bryan Harkins, Executive Vice President, Head of Markets, added that by keeping the markets and exchanges open investors were provided with immediate relief from the risk they were managing. While dark pools and off-board trading might provide the absolute most cost efficient means of getting an order filled, these venues prioritize price over time.
“When one wants to hedge the flight to lit markets becomes crucial,” Harkins said. “Lit liquidity decreases the risk in a trade quickly and the need for immediacy is first and foremost on many investors’ minds.”
Harkins disclosed to webinar attendees that there were other discussions aside from full closure that were being talked that included shorter hours of operation and short sale restrictions. And these too would hurt the proper functioning of the marketplace.
“Traders, investors and the market pros depend on certainty of rules to navigate the markets. You can change these rules but not in a hasty manner,” Harkins said. “Changing rules mid-flight creates risk and technical failures and the same goes for changing hours. There are many technical things that are keyed or coded into specific times and dates in trading.”
NYSE’s Blaugrund and Nasdaq’s Cohen both continued and said that staying open was very important and with all rules unchanged.
“In mid-March some felt declaring a market holiday would bring calm – a well-intentioned notion but flawed one. It is very important for people to have access to their savings and money,” he said. “Closing could create a rush on cash. Despite the first time in the modern era where market wide circuit breakers were invoked, there was still no panic to sell as people knew market would re-establish itself. Maintaining markets was a priority.”
And a priority only an open market could achieve. As the old market adage goes, liquidity begets liquidity.
“We want to be part of the solution and its important we stay open. People have liquidity needs and closing markets isn’t a good idea,” Cohen said. “It’s Important for firms to access capital. We looked at other exchanges that closed and this presented risk to how markets operate. We did consider shortening hours but the marginal benefits to be had against resultant volatility and risk weren’t acceptable.”