The longest weather-related shutdown of U.S. stock trading since1888 ended Oct. 31 without incident, while underscoring howvulnerable the world's biggest financial market remains todisasters.

Duncan Niederauer, the chief executive officer of NYSE Euronext,said trading went smoothly as American equity markets came back tolife after a 48-hour hiatus forced by Hurricane Sandy. Trading wassuspended three days earlier when concerns about human safety andhow well the New York Stock Exchange's backup plan would workconvinced executives that moving ahead was too risky.

The Securities and Exchange Commission may consider whetherexchanges' emergency regimens need to be bolstered, according to aperson familiar with the regulator's thinking who asked not to benamed because the matter is private. The industry's decision tohalt equities and bond trading shows the challenge of maintainingmarkets when a catastrophe threatens New York City, home to 168,700securities industry workers.

“One of the purposes of having electronic exchanges and basingthem away from New York City is for the market to be more robustand stay open,” Charles Jones, a finance professor at ColumbiaBusiness School in New York, said in a phone interview. “This iswhat the back-up plans were designed for. But the markets didn'topen.”

The SEC will also assess whether lessons from this week's eventsshould lead to new requirements as the agency works to convertguidelines adopted 20 years ago to ensure the stability of exchangetechnology and systems into a rule, the person said.

“Deciding in advance to close the market when there's a greatlikelihood things will be bad is a good decision,” former SECChairman David Ruder said in a phone interview. “Later on,regulators will probably ask, 'Are the back-up facilitiessufficiently strong to handle unexpected events?' It will be alaborious and time-consuming process.”

The 1993 bombing of the World Trade Center prompted thesecurities and banking industry to begin an examination of whetherfinancial markets could withstand a terrorist attack or othercatastrophe, Robert Greifeld, CEO of Nasdaq OMX Group Inc., said inan Oct. 31 interview on Bloomberg Television's “Street Smart” withDominic Chu. The effort expanded after Sept. 11, 2001. While thedecision to shut markets to protect employees this week was right,it showed that too much infrastructure may be concentrated in NewYork, he said.

'Hurricane, Tornado'

“We cannot be locked into this geography,” he said. “The keypoint is to be ready no matter what happens, whether it's ahurricane, tornado, terrorist attack. It's our job to make sure themarkets are ready to function.”

Brokers began preparing for Sandy last week, institutingcontingency plans and moving staff in case communications networksfailed and the bridges and tunnels into New York City were closed.Discussions between primary dealers in the bond market, officialsat the U.S. Treasury Department and New York Federal Reserve, andexecutives at the Securities Industry and Financial MarketsAssociation took place over the weekend before an auction ofTreasury bills scheduled for Oct. 29, according to a person withdirect knowledge of the matter.

While banks and dealers were prepared to handle the sale andexpected broad participation, plans for another auction the nextmorning were moved up a day because of the weather. Just before 7p.m. on Oct. 28, Sifma, a trade group for banks, brokers and assetmanagers, recommended that bond markets close at noon the nextday.

Stock exchanges and brokers built or augmented back-up plans tooperate during a disaster over the last decade. NYSE Euronextproposed an arrangement in 2009 that involves shutting down thetrading floor in its headquarters at 11 Wall Street in New York andcarrying out Big Board trading over NYSE Arca, the all-electronicmarket it acquired in 2006, the year the company had its initialpublic offering.

Shortly after 4 p.m. on Sunday, Oct. 28, as Sandy sped towardthe American Northeast with winds of 75 miles per hour, prompting amandatory evacuation of parts of New York, executives of NYSEEuronext said they would put that plan into action for the firsttime. The New York Mercantile Exchange, which trades natural gasand crude oil futures, had already said it was shutting its tradingfloor in lower Manhattan.

Executives took the step out of an “abundance of caution” forthe lives of employees, market makers and traders at the Big Board,and clients, Larry Leibowitz, chief operating officer at NYSEEuronext, said in a phone interview at about 5 p.m. on Oct. 28. Hecited reservations about opening during what might be a “100-yearstorm,” saying that only time would tell if it was the bestdecision for securities firms and the capital markets.

More Competition

The role of the NYSE floor in American equity markets hasdiminished since September 2001 as the exchange ceded market shareto competitors. While 83 percent of trading in NYSE companiesoccurred on the Big Board then, only about 21 does now followingthe growth of Nasdaq OMX and rise of new electronic rivals run byDirect Edge Holdings LLC in Jersey City, New Jersey, and Lenexa,Kansas-based Bats Global Markets Inc.

Still, the prices generated by the main exchanges that bringcorporations public remains vital for calculations used by manymutual funds and vendors that sell market data.

While trading has become more fragmented, New York and NewJersey remain the heart of the American securities industry. Byinvoking its contingency plan for trading, the NYSE would haveeffectively forced banks and brokers to send programmers into thecity Sunday night to code and test systems, five people with directknowledge of the matter said. Not all brokerage members of theexchange participated in the system's last test in March.

“They could have left the electronic exchanges open,” MarkTurner, head of U.S. sales trading at New York-based Instinet Inc.,said in a phone interview. “But with people unable to access theiroffices, it could have been like the Friday after Thanksgivingwhere volume would be extremely light, which opens the door forvolatility.

At 6:30 p.m. on the eve of Sandy's arrival, the NYSE held aconference call in which its biggest customers opposed the backupplan, saying the prospect of malfunctions was too great, accordingto four people with direct knowledge of the discussions who askedto remain anonymous because the talks were private. Danger from theworsening weather fueled anxiety about having to send employeesinto the city, the people said.

“All of these disasters are a tough call,” Leibowitz said. “Ifyou overreact, people say after, 'They acted like a bunch ofbabies.' If you underreact and don't take enough measures andsomething bad happens, you've got an even bigger problem. Findingthat line is always really hard.”

Ensuring the accuracy of technical changes and software updatesis increasingly critical to the operation of markets transformed byelectronic trading over the last five years, said Ruder, now aprofessor at Northwestern University's School of Law in Chicago.Brokers and exchanges told the SEC in early October that systemsmust be properly tested before they're implemented in the marketsto avoid disruptive trading.

Brokers preparing for NYSE's contingency trading using Arcawouldn't have faced many technical hurdles, Leibowitz said on Oct.28.

“For the most part there's not anything new required by theindustry,” since most orders would be redirected to the electronicvenue behind the scenes, he said.

NYSE's member brokers disagreed on the 6:30 p.m. conferencecall. Participants questioned the judgment of requiring them toswitch to systems that hadn't been recently or adequately tested,people familiar with the discussions said. Callers warned oftechnical glitches, confusion and the threat of disorderly tradingbecause of the last-minute change to opt for the back-up plan whenbrokers were functioning with skeletal staff, the people said.

The conference call was followed by three more arranged bySifma. Regulators from the SEC and Financial Industry RegulatoryAuthority joined executives from the Investment Company Institute,exchanges and brokers as consensus grew that the markets shouldclose, people familiar with the discussions said.

On a 7:30 p.m. Sifma call, which one person said had at least100 attendees, banks and brokers unanimously pressed for markets toshut, the people said. Joe Mecane, head of U.S. equities for NYSEEuronext, attended, along with executives from Nasdaq OMX, Bats andDirect Edge.

SEC Informed

Two smaller Sifma calls followed at 8:30 p.m. and 9:30 p.m.Robert Cook, the director of the SEC's division of trading andmarkets, and other officials from the unit, participated, alongwith executives from CME Group Inc. and IntercontinentalExchangeInc., which offer trading in equity-index futures, the peoplesaid.

SEC Chairman Mary Schapiro was informed of discussionsthroughout the evening, according to a person familiar with thematter. Officials at the SEC, Commodity Futures Trading Commission,New York Fed and Treasury Department that were consulted aboutshutting the markets didn't object to the decision for equities bythe stock exchanges and Finra and the recommendation by Sifma forfixed income, the people said.

Opening the markets on Oct. 31 was critical to all the parties,they said.

The suspension of equities trading was announced at about 11p.m. on Oct. 28, after predictions for storm damage worsened andalmost seven hours after NYSE said it would invoke its contingencyplan. The markets closed Oct. 29 and 30, the first time they'vebeen shut for consecutive days due to weather since a blizzard inMarch 1888. They were last closed for four days including a weekendand the national day of mourning for President Gerald Ford in2007.

Equity and fixed-income markets began trading Oct. 31, with NewYork City Mayor Michael Bloomberg, the founder and majority ownerof Bloomberg LP, ringing the opening bell at the NYSE. The Standard& Poor's 500 Index rose less than 0.1 percent from Friday'sclose to 1,412.16 at 4 p.m. in New York. Volume was 6.33 billionshares, or 7 percent above the three-month average. Futures on theS&P 500 slipped less than 0.1 percent at 8:24 a.m. in Londontoday.

“Given the weather and that the entire Northeast corridor wasgoing to be closed, there wasn't a big reason to risk the viabilityof the marketplace and add to the confusion,” Sang Lee, managingpartner at Boston-based Aite Group LLC, said in a phone interview.“It would have been much worse had they opened and something wentwrong.”

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