Senior bankers believe that authorities should be considering a potential shut down of financial markets to avoid sliding stock markets adding to the coronavirus panic and to protect the companies listed on them. Trading has already been halted on Wall Street several times over the past couple of weeks as ‘circuit breakers’ have been activated.
Trading is paused for 15 minutes if the market rises or falls by over 5% before 14:45. After 14:45, if the day’s volatility exceeds 7%, trading is halted until the end of the session. These ‘circuit breakers’ are designed to offset the danger of ‘flash crashes’ or booms resulting from algorithmic trading and also to prevent panic selling during periods of particular turbulence. Giving investors 15 minutes to cool off is seen as an effective way to let the steam out of overheating markets, preventing emotions from running too high.
But the level of volatility seen over the last week or so, with markets regularly rising and falling by over 5% in a day, something generally extremely rare, has led some to begin to call for a longer hiatus to be given to markets.
Although there has been intermittent relief and upwards movements on the announcement of stimulus and support efforts by central banks and governments, markets generally been on a steep downwards trajectory. The loss of market value could imperil the future of the worst hit companies and the feeling is the red stock market graphs published every day is unhelpfully adding to the general social and economic panic.
Stock markets have now seen as major a sell-off as the great 1929 Wall Street crash. Monday’s S&P 500 fall was the third largest for a single trading session since the index was launched in 1927.
The extent of the ‘fear’ gripping markets has led several high-profile bankers to argue that financial markets are not currently able to perform their ‘core function’ of price discovery. If authorities reach the same conclusion there is an argument that it might be better for trading to be halted for a period. However, at least for now the calls are being limited to smaller markets with low levels of liquidity. Shutting down main markets would be an absolute last resort. London’s AIM market is an example of the kind that could be paused.
Deutsche Bank strategist Jim Reid commented for The Times:
“At the moment you are closing economies and leaving markets to fend for themselves. I wonder whether it is counterproductive to keep them [markets] open. On the other hand, companies still need finance and liquidity and individuals need access to their money.”
There are precedents of markets being temporarily closed during extreme circumstances. The New York Stock Exchange was shut down for 2 days in October 2012 while the city was caught in the grip of Hurricane Sandy and markets also close for a week after the 9/11 terrorist attacks. During 1933, at the height of the Great Depression the NYSE was also closed for a week. In London, trading has only been stopped for several days during the Second World War, though there was a 5-month break during the First World War. Markets never closed during the 2008 financial crisis.
New Bank of England governor Andrew Bailey warned this week that markets were “bordering on disorderly”, adding “I am of the view that markets are the price discovery mechanism. Our action is to bring that back where it is not working.”
The BoE has already intervened in commercial paper markets this week, and in the USA the Fed has started schemes designed to stop disorderly liquidation. Mr Bailey believes central banks will have to be willing to take drastic measures to keep markets working, potentially becoming “market-maker of last resort facilities”, for the trade of assets.
Such intervention would normally not be considered appropriate but in this case there is not believed to be any major structural issue in market outside of the halt to economic activity being caused by the coronavirus shutdown. As such, central banks are acting to head off the ‘social damage’ that total market meltdown would inevitably lead to.