With each passing day in the coronavirus crisis, as stock markets appear to fall incessantly, it is increasingly being asked whether it would not be better for them to close.
On the face of it, the idea has attractions.
Circuit breakers kick in when, for example, major stock indices like the Dow Jones Industrial Average or the S&P 500 fall below a certain level. These temporarily suspend trading in order to dampen volatility and prevent panic selling.
The length of the suspension will depend on the extent of the fall. A “level one” fall or “level two” fall on the New York Stock Exchange, respectively a 7% or 13% drop in an index, will see trading halted for a quarter of an hour.
A so-called “level three” fall, which is one of 20% or more, sees trading suspended for the rest of the session.
Meanwhile, trading can be suspended in individual securities, for example – in the words of the Financial Conduct Authority – where a company is unable to “assess accurately its financial position and inform the market accordingly”.
A good example here is NMC Healthcare, until recently a member of the FTSE 100, whose shares were suspended on 27 February after its financial position became uncertain.
Why not then, it is argued, would the market authorities not countenance a suspension in trading? Such a suspension might in theory prevent the continued erosion in confidence caused by these corrosive falls.
This idea is gaining currency among some market participants.
Bill O’Donnell, US rates desk chief strategist at banking giant Citi, told clients in a note today: “One might not be faulted to assume that a next major step might be to shut the stock markets to prevent a further, self-fuelling sell-off.”
There are good reasons, however, why such a suspension would not necessarily make sense.
The first is the sheer interconnectedness of markets – they interconnect with each other across different types of financial security and across different types of time zone.
For example, shares of BHP and Rio Tinto, two of the world’s biggest mining companies, are listed in both London and Sydney and are constituents of both the FTSE 100 and its Australian counterpart, the ASX 200. Trading in shares of such companies would need to be suspended in both markets otherwise investors in either London or Sydney would be put at a disadvantage if one market were to close and the other were to remain open.
Trading in the derivatives of those companies, for example a futures or options contract in the shares of those companies, would also need to be suspended in both locations.
Similarly, markets such as the cash equities and the futures markets are highly interconnected. It would make little sense to close one and not the other.
That interconnectedness operates across all financial asset classes and across all time zones.
So any suspension of stock markets would have to involve a co-ordinated global response, involving derivatives markets, or things could become very untidy.
As Michael Hewson of CMC Markets, told Sky News: “It would be highly unusual for that to happen and it could cause unintended consequences all by itself – which markets do you shut down, do you just shut the stock market, do you shut credit markets?”
He pointed out that, despite the volatility of the financial crisis in 2008, markets continued functioning.
Another reason not to close markets is because it would prevent their basic function.
Adena Friedman, president and chief executive of Nasdaq, told CNBC: “In our view it is critically important that the markets continue to operate and that investors continue to be able express themselves in the markets.
“Even last Thursday, during the very challenging markets we experienced, we did have a small healthcare company go public.
“It is important to remember that markets exist to give companies access to capital, particularly companies working with this virus.
“Having access to capital on a ready basis is critically important to companies to fund their operations – so we think the capital markets remain open during this process.”
That is not to say markets cannot be shut down entirely. The US markets, for example, were closed for four days following the terror attacks of 11 September 2001.
The most recent example is how, on 29 and 30 October 2012, US markets were closed after Hurricane Sandy battered New York and the US east coast.
The New York Stock Exchange, which unlike the London Stock Exchange still has a physical trading floor, announced its closure due to the risks involved in moving around its headquarters on Wall Street in Lower Manhattan. The NYSE is an unusual case because it still has physical trading and, at the time, there was a discussion about moving to purely electronic trading – but market participants were lacking in confidence in the systems.
Such closures seem unlikely this time around.
Stacey Cunningham, president of the NYSE, tweeted this afternoon: “It is important for the markets to remain open, and for them to function in a fair and orderly manner, as they have been.
“While we are deeply conscious of, and sympathetic to, investors’ concerns around price declines, the market is a reflection of the larger uncertainties that everyone is experiencing during these challenging days.
“Closing the markets would not change the underlying causes of the market decline, would remove transparency into investor sentiment, and reduce investors’ access to their money. This would only further compound the current market anxiety.”
It seems, then, that the only thing likely to result in the closure of markets will be if people who work in the markets – and most specifically in the infrastructure, such as the exchanges and the clearing houses – succumb to coronavirus themselves.