The World Federation of Exchanges (WFE) offers a guide to best practices for its members coping with a pandemic wreaking havoc on global markets.
The World Federation of Exchanges (WFE), the global financial industry trade group for exchanges and central clearing counterparties, or CCPs, has issued a report that asserts financial exchanges around the world have to keep running or the international financial system will slow to a crawl.
The WFE statement declares, in part, that the “economic impact of the Covid-19 pandemic has introduced extraordinary volatility in global financial markets, as participants are obliged to reassess their valuations of all investments and associated derivatives as the situation develops. In an environment where uncertainty makes it unusually hard to price assets and for market-makers to operate, exchanges are providing the only way to establish consensus on these valuations in real time.
“As such, WFE members expect to continue to operate for as long as normal during trading days. CCPs, meanwhile, continue to take prompt action with respect to the credit risk associated with participants’ open positions. The WFE is in turn facilitating the exchange of best practice among its members, who operate over 150 such pieces of infrastructure in over 90 countries around the world,” according to the WFE statement.
“Volatility has reached levels comparable with the Global Financial Crisis of 2008, with one-day losses not seen since 1987,” the WFE statement continues. “The situation is made more challenging by high levels of indebtedness and already low interest rates. As the global representative body of exchanges and CCPs, the WFE is working with our member community to share best practice, mitigate risk, and coordinate responses (where permitted by antitrust laws) during this crisis.”
The WFE also points out measures that can address that volatility, including:
- “Circuit breakers (sometimes referred to as ‘volatility control mechanisms’) [that] are triggered in order to allow for ‘cooling off’;
- “Pricing bands — the ranges at which market makers are permitted to quote bids/asks — [which] are appropriately adjusted, to allow for continuous trading in the context of high volatility”; and
- “Exchanges and CCPs remaining in constant contact with their members, peers and authorities to coordinate updates to help maintain stability across markets.”
Also, “exchanges and CCPs have triggered continuity plans (involving, for example, remote working and working from secondary sites),” the WFE notes, intended “to ensure their operational resilience and ability to serve their markets, against the backdrop of social distancing policies that governments around the world are adopting.”
Finally, financial professionals and others should also be aware that the WFE offers an “online depository of COVID-19-related public communications from exchanges and CCPs on its website as a resource for the financial community and our stakeholders.”
That WFE statement comes as the New York Stock Exchange, among others, has “temporarily” closed its outcry trading floor this week amid rising concerns about how to protect financial and other institutions during the COVID-19 pandemic. At the close of the final day of that outcry trading, Friday, March 20, the Dow was down 913 points.
“Outcry trading” is a shorthand description of the system of verbal and gestural communication most often associated with popular depictions of daily activities in stock exchange trading pits.
But even before the advent of the pandemic, the practice of open-pit outcry trading was giving way around the globe to electronic ordering systems.
Other open outcry trading venues made the transition sooner than the New York Stock Exchange, FTF News has reported.
For example, on March 15, Nasdaq announced that “the Nasdaq PHLX Options Market trading floor in Philadelphia will temporarily close on Tuesday, March 17, until further notice; all options trading will transition to an electronic-only environment,” according to a NASDAQ statement.
“All electronic Nasdaq-operated equities, options, and fixed income markets will remain in operation during this period, with only critical operational personnel on-site working in either split teams or rotating staff schedules,” Nasdaq says.
Meanwhile, on March 16, Dubai Financial Markets (DFM) officials, announced that they, too, would be closing open outcry on the trading floor. Instead of open outcry, market participants will use DFM online electronic transaction system or the systems of their brokers, FTF News reported. The Abu Dhabi Securities Exchange has also halted outcry trading.
“For the moment, these exchange operators are not announcing when they will reopen their outcry trading floors,” according to the recent FTF News report.
“Intercontinental Exchange will continue to monitor events to determine the appropriate time to re-open the NYSE trading floors,” say officials there, echoing what other exchange operators are saying.
For now, the NYSE is “launching a business continuity plan (BCP) and will transition “on a temporary basis, to fully electronic trading on Monday, March 23. Trading and regulatory oversight of all NYSE-listed securities will continue without interruption,” according to a prepared statement from Intercontinental Exchange, Inc. (ICE), the exchange’s parent company.
“All-electronic trading will begin with Monday’s market open. The facilities to be closed comprise the NYSE equities trading floor in New York, NYSE American Options trading floor in New York, and NYSE Arca Options trading floor in San Francisco,” according to officials.
“NYSE’s trading floors provide unique value to issuers and investors, but our markets are fully capable of operating in an all-electronic fashion to serve all participants, and we will proceed in that manner until we can re-open our trading floors to our members,” Stacey Cunningham, NYSE president, says in a statement.
“While we are taking the precautionary step of closing the trading floors, we continue to firmly believe the markets should remain open and accessible to investors,” Cunningham says. “All NYSE markets will continue to operate under normal trading hours despite the closure of the trading floors.”
The question of changing trading hours received major media attention when U.S. Treasury Secretary Steven T. Mnuchin suggested it during a COVID-19 update press conference on Tuesday, March 17. Advocates of the push for shorter trading hours for U.S. financial markets say it might curb volatility and thus calm the fears of investors.
However, the suggestion was met with stiff opposition in Chicago from the CME Group, a major operator of exchanges for derivatives.
“We were quite surprised to hear Secretary Mnuchin say he is coordinating with the New York Stock Exchange on possible shortened trading hours, even though he has not reached out to all cash equity and futures markets including CME Group and Nasdaq,” said Terry Duffy, CEO and group chairman of the CME Group.
“Shorter hours make no sense,” Duffy continued. “Financial markets are critical to managing risk and ensuring the resilience of the U.S. and global economies. Therefore, they must remain open, especially during this unprecedented crisis when news, information and events are changing at such a rapid pace.”
For the shutdown, NYSE officials say that there are “robust, regularly tested contingency plans in place to initiate fully electronic trading on its exchanges that have physical trading floors,” according to the NYSE statement.
“On the NYSE’s equities market, the Exchange’s Designated Market Makers will connect to the exchange electronically to provide liquidity in their stocks, however floor broker order types will be unavailable,” officials say. “On the NYSE’s options markets, electronic trading will continue normally but open-outcry trading will be suspended with the closure of the options trading floors.”
Other open outcry trading venues made the transition sooner than ICE/NYSE.
On March 15, Nasdaq announced that “the Nasdaq PHLX Options Market trading floor in Philadelphia will temporarily close on Tuesday, March 17, until further notice; all options trading will transition to an electronic-only environment,” according to an official statement.
“All electronic Nasdaq-operated equities, options, and fixed income markets will remain in operation during this period, with only critical operational personnel on-site working in either split teams or rotating staff schedules,” according to Nasdaq.
The unfolding pandemic makes its nearly impossible for exchanges to know when outcry trading floors will reopen.
As the week of March 23 began, the S&P 500 lost $9 trillion of its value since it hit a record high in February, the Fed announced a program of “quantitative easing,” and the U.S. Surgeon General said, “I want America to understand — this week, it’s going to get bad.”
The complete WFE statement is available at: https://bit.ly/3brBoJN
The WFE’s coronavirus-information depository is available at: https://bit.ly/3aizafB
As the pandemic unfolds, FTF News remains committed to continuing to bring readers timely and useful information.
— Eugene Grygo contributed to this report