The longest weather-related shutdown of U.S. stock trading since 1888 ended Oct. 31 without incident, while underscoring how vulnerable the world's biggest financial market remains to disasters.
Duncan Niederauer, the chief executive officer of NYSE Euronext, said trading went smoothly as American equity markets came back to life after a 48-hour hiatus forced by Hurricane Sandy. Trading was suspended three days earlier when concerns about human safety and how well the New York Stock Exchange's backup plan would work convinced executives that moving ahead was too risky.
The Securities and Exchange Commission may consider whether exchanges' emergency regimens need to be bolstered, according to a person familiar with the regulator's thinking who asked not to be named because the matter is private. The industry's decision to halt equities and bond trading shows the challenge of maintaining markets when a catastrophe threatens New York City, home to 168,700 securities industry workers.
“One of the purposes of having electronic exchanges and basing them away from New York City is for the market to be more robust and stay open,” Charles Jones, a finance professor at Columbia Business School in New York, said in a phone interview. “This is what the back-up plans were designed for. But the markets didn't open.”
The SEC will also assess whether lessons from this week's events should lead to new requirements as the agency works to convert guidelines adopted 20 years ago to ensure the stability of exchange technology and systems into a rule, the person said.
“Deciding in advance to close the market when there's a great likelihood things will be bad is a good decision,” former SEC Chairman David Ruder said in a phone interview. “Later on, regulators will probably ask, 'Are the back-up facilities sufficiently strong to handle unexpected events?' It will be a laborious and time-consuming process.”
The 1993 bombing of the World Trade Center prompted the securities and banking industry to begin an examination of whether financial markets could withstand a terrorist attack or other catastrophe, Robert Greifeld, CEO of Nasdaq OMX Group Inc., said in an Oct. 31 interview on Bloomberg Television's “Street Smart” with Dominic Chu. The effort expanded after Sept. 11, 2001. While the decision to shut markets to protect employees this week was right, it showed that too much infrastructure may be concentrated in New York, he said.
'Hurricane, Tornado'
“We cannot be locked into this geography,” he said. “The key point is to be ready no matter what happens, whether it's a hurricane, tornado, terrorist attack. It's our job to make sure the markets are ready to function.”
Brokers began preparing for Sandy last week, instituting contingency plans and moving staff in case communications networks failed and the bridges and tunnels into New York City were closed. Discussions between primary dealers in the bond market, officials at the U.S. Treasury Department and New York Federal Reserve, and executives at the Securities Industry and Financial Markets Association took place over the weekend before an auction of Treasury bills scheduled for Oct. 29, according to a person with direct knowledge of the matter.
While banks and dealers were prepared to handle the sale and expected broad participation, plans for another auction the next morning were moved up a day because of the weather. Just before 7 p.m. on Oct. 28, Sifma, a trade group for banks, brokers and asset managers, recommended that bond markets close at noon the next day.
Stock exchanges and brokers built or augmented back-up plans to operate during a disaster over the last decade. NYSE Euronext proposed an arrangement in 2009 that involves shutting down the trading floor in its headquarters at 11 Wall Street in New York and carrying out Big Board trading over NYSE Arca, the all-electronic market it acquired in 2006, the year the company had its initial public offering.
Shortly after 4 p.m. on Sunday, Oct. 28, as Sandy sped toward the American Northeast with winds of 75 miles per hour, prompting a mandatory evacuation of parts of New York, executives of NYSE Euronext said they would put that plan into action for the first time. The New York Mercantile Exchange, which trades natural gas and crude oil futures, had already said it was shutting its trading floor in lower Manhattan.
Executives took the step out of an “abundance of caution” for the lives of employees, market makers and traders at the Big Board, and clients, Larry Leibowitz, chief operating officer at NYSE Euronext, said in a phone interview at about 5 p.m. on Oct. 28. He cited reservations about opening during what might be a “100-year storm,” saying that only time would tell if it was the best decision for securities firms and the capital markets.
More Competition
The role of the NYSE floor in American equity markets has diminished since September 2001 as the exchange ceded market share to competitors. While 83 percent of trading in NYSE companies occurred on the Big Board then, only about 21 does now following the growth of Nasdaq OMX and rise of new electronic rivals run by Direct 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 bring corporations public remains vital for calculations used by many mutual funds and vendors that sell market data.
While trading has become more fragmented, New York and New Jersey remain the heart of the American securities industry. By invoking its contingency plan for trading, the NYSE would have effectively forced banks and brokers to send programmers into the city Sunday night to code and test systems, five people with direct knowledge of the matter said. Not all brokerage members of the exchange participated in the system's last test in March.
“They could have left the electronic exchanges open,” Mark Turner, head of U.S. sales trading at New York-based Instinet Inc., said in a phone interview. “But with people unable to access their offices, it could have been like the Friday after Thanksgiving where volume would be extremely light, which opens the door for volatility.
At 6:30 p.m. on the eve of Sandy's arrival, the NYSE held a conference call in which its biggest customers opposed the backup plan, saying the prospect of malfunctions was too great, according to four people with direct knowledge of the discussions who asked to remain anonymous because the talks were private. Danger from the worsening weather fueled anxiety about having to send employees into the city, the people said.
“All of these disasters are a tough call,” Leibowitz said. “If you overreact, people say after, 'They acted like a bunch of babies.' If you underreact and don't take enough measures and something bad happens, you've got an even bigger problem. Finding that line is always really hard.”
Ensuring the accuracy of technical changes and software updates is increasingly critical to the operation of markets transformed by electronic trading over the last five years, said Ruder, now a professor at Northwestern University's School of Law in Chicago. Brokers and exchanges told the SEC in early October that systems must be properly tested before they're implemented in the markets to avoid disruptive trading.
Brokers preparing for NYSE's contingency trading using Arca wouldn't have faced many technical hurdles, Leibowitz said on Oct. 28.
“For the most part there's not anything new required by the industry,” since most orders would be redirected to the electronic venue behind the scenes, he said.
NYSE's member brokers disagreed on the 6:30 p.m. conference call. Participants questioned the judgment of requiring them to switch to systems that hadn't been recently or adequately tested, people familiar with the discussions said. Callers warned of technical glitches, confusion and the threat of disorderly trading because of the last-minute change to opt for the back-up plan when brokers were functioning with skeletal staff, the people said.
The conference call was followed by three more arranged by Sifma. Regulators from the SEC and Financial Industry Regulatory Authority joined executives from the Investment Company Institute, exchanges and brokers as consensus grew that the markets should close, people familiar with the discussions said.
On a 7:30 p.m. Sifma call, which one person said had at least 100 attendees, banks and brokers unanimously pressed for markets to shut, the people said. Joe Mecane, head of U.S. equities for NYSE Euronext, attended, along with executives from Nasdaq OMX, Bats and Direct 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 and markets, and other officials from the unit, participated, along with executives from CME Group Inc. and IntercontinentalExchange Inc., which offer trading in equity-index futures, the people said.
SEC Chairman Mary Schapiro was informed of discussions throughout the evening, according to a person familiar with the matter. Officials at the SEC, Commodity Futures Trading Commission, New York Fed and Treasury Department that were consulted about shutting the markets didn't object to the decision for equities by the stock exchanges and Finra and the recommendation by Sifma for fixed 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 11 p.m. on Oct. 28, after predictions for storm damage worsened and almost seven hours after NYSE said it would invoke its contingency plan. The markets closed Oct. 29 and 30, the first time they've been shut for consecutive days due to weather since a blizzard in March 1888. They were last closed for four days including a weekend and the national day of mourning for President Gerald Ford in 2007.
Equity and fixed-income markets began trading Oct. 31, with New York City Mayor Michael Bloomberg, the founder and majority owner of Bloomberg LP, ringing the opening bell at the NYSE. The Standard & Poor's 500 Index rose less than 0.1 percent from Friday's close to 1,412.16 at 4 p.m. in New York. Volume was 6.33 billion shares, or 7 percent above the three-month average. Futures on the S&P 500 slipped less than 0.1 percent at 8:24 a.m. in London today.
“Given the weather and that the entire Northeast corridor was going to be closed, there wasn't a big reason to risk the viability of the marketplace and add to the confusion,” Sang Lee, managing partner at Boston-based Aite Group LLC, said in a phone interview. “It would have been much worse had they opened and something went wrong.”
Bloomberg News
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