To trade or to halt? That is the question confounding global markets as stock indexes plunge amid pandemic

As governments from Auckland to San Francisco took the unprecedented step of ordering residents to stay home to contain the coronavirus pandemic, financial regulators faced a vexing question: what to do with the stock markets, especially the ones that still employ humans on trading floors?

New York Stock Exchange (NYSE) on Monday closed its iconic trading floor and transferred all transactions to its electronic trading platform after two people working at the world's largest financial market caught the novel coronavirus SARS-CoV-2, the pathogen that has claimed more than 15,000 lives so far globally. The bourses of Manila and Colombo suspended trading last week in stops and starts, to disastrous ends.

Whether to halt transactions altogether, or maintain trading-as-usual purely online, had confounded financial regulators in recent weeks, as worldwide stock indexes moved inversely with coronavirus cases and death toll. As one market index after another continued to plumb new lows, brokers, strategists and bourse operators alike agreed on one thing: the consequence of stopping transactions entirely would be worse than any short-term breather, both to economic stability and to stock prices.

"If you stop investors from cutting their losses, the result would be even more" losses, because panic selling would set in whenever the market reopens, said Geo Securities's chief executive Francis Lun Sheung-nim in Hong Kong. "You should let the market run its course until common sense takes over."

The conundrum has become ever more difficult, after the US Federal Reserve's two emergency rate cuts in two weeks failed to calm market panic. With Europe surpassing China as the new epicentre of the global pandemic, and the US soaring to number three in confirmed cases, the spectre of a global recession is coming clearer into focus.

US authorities have ordered one in three Americans to stay at home " calling the instructions "shelter in place" in some cases, not quarantines " to contain the outbreak. The disruption to business and daily life has affected the global economy in ways unseen since the 2008 global financial crisis, with joblessness rising sharply and policymakers struggling to craft solutions to address the downturn.

"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," NYSE president Stacey Cunningham said last week in announcing the closure.

New York State has since asked all non-essential workers such as health care workers or grocery store employees, to stay at home as the state had more than 32,000 confirmed cases as of Monday.

To be sure, global stock markets have shut in the past, whether in celebration or calamity.

The NYSE and Nasdaq both closed for four days during the terrorist attacks of September 11th, and for two days in 2012 when Hurricane Sandy made landfall on the US East Coast. Earlier in history, the NYSE closed after the 1963 assassination of US President John F. Kennedy, and in 1969 for the Apollo 11 moon landing. The longest closure the NYSE had in two centuries was for four months in 1914 during World War I.

Financial markets are better able to continue trading today because of the growth of electronic trading. So-called open outcry trading, where floor traders shout or signal their buy-sell orders is gradually disappearing.

Many bourses, including the Hong Kong stock exchange, replaced trading floors with electronic transactions. Still, inclement weather could close the Hong Kong stock market, especially when the Typhoon Signal 8 or Black Rainstorm Warning " the most devastating levels of the annual typhoon season " are issued. Weather aside, the only time the Hong Kong stock exchange (HKSE) closed was for four days in October 1987 during the Black Monday market rout.

Charles Li aims to keep Hong Kong's stock exchange fully operational. Photo: Nora Tam alt=Charles Li aims to keep Hong Kong's stock exchange fully operational. Photo: Nora Tam

"We remain committed to keeping our markets fully operational, though the current global pressures on financial markets mean that we will continue to operate with a heightened sense of vigilance in the coming weeks and months," Hong Kong Exchanges and Clearing (HKEX) chief executive Charles Li Xiaojia said on March 18. "Functioning capital markets, with their price discovery and risk management capabilities, play a critical function in ensuring global economic stability, and we are focused on playing our role."

It is important to distinguish between the need to maintain transactions, and the imperative to protect exchange personnel, from runners to market makers, said the World Federation of Exchanges (WFE).

"It is important that markets remain open and that the hours of trading remain as normal, to preserve the benefits of price formation and access to liquidity for society," the guild of global bourses said. "As for key personnel of other critical national infrastructures, there is a need to ensure exemptions for critical financial market infrastructure personnel in the event of any 'shelter in place' or 'lockdown' policy."

Besides ceasing all transactions on the entire market, most major stock exchanges have "circuit breakers" in place to pause trading, giving the market the necessary time for any sudden surge or slump in prices to ease. Circuit breakers halted trading for 15 minutes on the NYSE on three separate days last week after the S&P 500 index tumbled.

In addition, most markets also have limit-up and limit-down rules that put a ceiling or floor on stock prices to ease out volatility. China's A-shares have 10 per cent caps and floors in place, so that no stock price can jump or plunge by more than 10 per cent in one trading session. Hong Kong's exchange has "light-touch circuit breakers" that halt trading for 5 minutes in individual stocks in the event of abnormal price movements, while the entire market trades without brakes.

Fund managers said equity markets have generally remained liquid despite the sharp sell-off, even though one fund manager did report a rare case of not being able to buy the debt of a blue-chip company.

Traders would be likely to "sell first and ask questions later" in the event of market halts, especially if regulators are not careful in how they communicate the closure, said Credit Suisse's Asia-Pacific Chief Investment Officer John Woods.

"I don't necessarily disagree that shuttering a market is appropriate in the right circumstances, but it absolutely needs to be carefully communicated," Woods said. "Appropriate infrastructure, such as the ability to make a market outside the formal stock exchange, is probably quite helpful."

Traders work on the floor of the NYSE on March 20 as the building prepares to close indefinitely. Photo: Reuters alt=Traders work on the floor of the NYSE on March 20 as the building prepares to close indefinitely. Photo: Reuters

The benchmark index on the Colombo stock exchange plunged by 11.7 per cent when trading resumed on March 20 after an extended public holiday, before regulators again suspended transactions on the entire exchange.

Mixed messages about the timing and duration of the halt in trading heightened confusion and prompted shambolic selling, said one broker in the city. Foreign institutional investors may not return to Sri Lanka after the coronavirus crisis is over because the exchange prevented them from trading, something the small and illiquid market can ill-afford, the broker said.

To be sure, there are cracks in the orderly functioning of markets that could necessitate shuttering them. The typical argument for investors to diversify their portfolios and own a mix of equities and bonds has broken down, due to the high correlation between asset classes in recent weeks, fund managers said.

The Dow Jones Industrial Average had its worst weekly performance since the global financial crisis last week and even typical safe-haven assets such as Treasury bonds suffered as investors retreated to the sidelines. While not as widely as some indices, the benchmark Hang Seng Index fell 19 per cent year to date.

Some stock brokers are pushing for trading to close, to limit margin calls for retail clients who do not have ready cash to meet the demands.

Algorithmic trading, particularly high-frequency technology, has exacerbated market swings, said money managers and financial consultants. Similar to the 2010 flash crash in New York, high-frequency managers can make thousands of transactions per second and amplify market slumps.

Governments would also have to grapple with the logistical difficulty of shuttering markets. To be effective, they would need to coordinate a shutdown of all stock, bond, currency, commodity, cash and futures markets. Authorities would also have to consider halting over-the-counter transactions and derivatives trades as well.

"There are proxies for trading many markets around the world like ETFs, futures, stocks listed in more than one country. It would be a drastic decision for a major market to shut for an extended period with investors who may need liquidity to raise cash or hedge," said Allen Veryan, head of machine-learning investment at a family office in Tokyo.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.