ADVERTISEMENT

Global Stock Exchanges Get Live Lesson in Perils of a Shutdown

Stock Exchanges Get Real-Time Lesson in Perils of a Shutdown

(Bloomberg) -- As stock exchanges around the world decide how to operate at a time of unprecedented market turmoil, the Philippines just offered a real-time lesson.

After two days without trading, equities tumbled 13% as the market reopened Thursday, with investors rushing to liquidate holdings once they could. It’s the reason many other exchanges around the world say they’ll stay open, even as they consider new restrictions like reduced hours or bans on short selling.

“Closing the markets generates even more panic,” Ignacio Cantos, investment director at ATL Capital in Madrid, said by phone. “Nowadays the systems are ready to support investors and traders working from home and it’s better if they remain open as the stock market has praised itself for being the asset that always offers prices. Of course, we are seeing big drops, but that may also generate historical opportunities.”

Global Stock Exchanges Get Live Lesson in Perils of a Shutdown

Equity market volatility not seen since the Great Depression has led to increasing debate about how best to limit such large stock swings. U.S. Treasury Secretary Steven Mnuchin has said his administration prefers to keep trading open.

France too signaled similar intent, with Robert Ophele, chairman of the country’s financial markets authority, saying in a Bloomberg TV interview that a suspension without a clear reopening deadline would be “highly counterproductive.”

Short Selling

Meanwhile, the European Union’s top market regulator is under pressure to ban short selling across the bloc, after several of its countries already did so in recent days to protect equities from excessive volatility. The U.K. has been more reluctant to follow suit, although it’s not all business as usual. The London Metal Exchange plans to temporarily suspend trading on its iconic open-outcry dealing floor for the first time since World War II.

Shorter trading hours has been an approach adopted by some countries, such as Serbia. Warsaw’s stock exchange came out against such a move, in response to a plea by Polish brokerages, saying it would pose operational and technical risks. The Federation of European Stock Exchanges also said its members -- which include Bulgaria, Romania, Hungary, Austria, Czech Republic and Croatia -- will operate normal hours.

Read: European Short Wagers Hit $52 Billion as Regulators Ban the Bets

With no end to volatile swings as worries about the impact of the coronavirus pandemic escalated, futures on the S&P 500 Index triggered circuit breakers several times this month, while trading in many Italian and Spanish shares were also halted as they hit limits on volatile days.

Exchanges Outperform

Keeping trading open has benefited exchanges at a time when businesses in travel and retailing have suffered greater blows.

Shares of exchange operators have declined less in the current sell-off compared with other financial-services firms. Spain’s BME has given up just 11% in the past month, the best performer among industry peers, while the Stoxx 600 Financial Services Index is down 42%. Euronext NV and Deutsche Boerse AG have also outperformed.

”During volatile periods, some traders will favor the exchanges, as they are often viewed as more stable, with better technology, and generally deeper liquidity,” said Anish Puaar, market structure analyst for Europe at Rosenblatt Securities. “Some may also be reluctant to rest orders in dark pools or periodic auctions if prices are swinging around because they want certainty of execution.”

Voicing Concern

Exchanges have voiced concern about regulatory measures being broached to curb steep declines. CME Group said shorter trading hours “make no sense,” and could increase volatility.

“Temporary pauses in trading happen on a frequent basis to allow the market to adjust, but to my knowledge we’ve never seen them be closed for days or weeks,” said Niki Beattie, founder at Market Structure Partners. “The trouble is that a shadow market might emerge of people who are able to find ways to take bets or make investments in other markets while the main markets are closed.”

‘Bad Signal’

History too indicates that an outright closure of markets will only delay, rather than curb steep declines. Post the 9/11 terrorist attacks of 2001, Wall Street was shut for four days, but the reopening triggered an immediate 13% sell-off. Stocks went on to drop 30% in the 12 months that followed.

Global equities appeared to stabilize on Thursday, following recent volatility, with the S&P 500 down 0.3% as of 11:05 a.m. in New York. The benchmark has gained or lost at least 4% in intraday trading in each session since March 4 through yesterday.

“Keeping markets open is important as it’s essential to set prices every day, whether they rise or fall,” said Stephane Ekolo, strategist at TFS Derivatives. “Shutting down markets would alter liquidity and trigger a counter-productive stress when they would eventually reopen.”

READ: EU Regulator Urged to Ban Short Selling With Emergency Power

Here’s a list of measures regulators around the world have taken this week to keep market volatility in check:

  • Short selling bans:
    • Italy ban in place for three months starting March 18
    • Spain for a month from March 17
    • Belgium until April 17
    • France for 30 days, announced March 17
    • Greece until April 24
    • Austria until April 18
    • Pakistan imposed uptick rule for short sales in 36 specific shares of futures market, for April 2020 contracts
  • Shorter trading hours:
    • Belgrade to shorten stock-exchange trading hours
  • Closure:
    • Philippines closed trading for two days through March 18
    • Sri Lanka shut stock market on March 17

©2020 Bloomberg L.P.