The stock exchange plays a critical role in operating financial markets and financing national economies. Big ticket IPOs may be off the table for the time being while companies assess the impact of the COVID-19 crisis on their capital raising ambitions (IPO issuance on European exchanges is down 83% year on year according to AFME), but the upkeep of orderly financial markets has never been more important in these times of extreme volatility.
Record declines and unprecedented trading volumes
The last few weeks have witnessed dramatic declines across all international indices as a result of the crisis. In the last six weeks alone, we have seen one Black Thursday and two Black Mondays, no less. 9 March was, at the time, the worst drop since the GFC in 2008, and three days later, Wall Street and the FTSE experienced their largest single-day percentage drops since the last Black Monday way back in 1987. The following week on 16 March (“Black Monday II”), all three Wall Street indices fell more than 12%. These were truly remarkable drops over such a short space of time.
All the meanwhile, there has been unprecedented levels of trading volumes across exchanges and other trading venues. According to data from Cboe, average daily trading volumes across exchanges in Europe rose to €69bn in the March, a 60% year-on-year increase. If this was stress test for market infrastructure, then the industry passed with flying colours. Markets have remained open and continued to function well, with built-in circuit breakers (a “cooling off” mechanism to reduce market volatility and panicked selloffs) kicking in to achieve their intended purposes. The Association for Financial Markets (AFME) also found that issuance of investment grade corporate bonds exceeded €50bn in the first week of April, the highest weekly amount ever issued in Europe. It must not be forgotten that all this took place a time when national governments around the world were ordering stringent lockdowns and the majority of staff were working from home.
During the madness of March, the idea of a temporary market closure was floated in some quarters, but ultimately, and rightly, regulators across Europe and the US recognised the vital importance of keeping markets open. Any market closure would have dramatically impacted investors’ ability to price risk, value portfolios and make informed investment decisions, while one also cannot underestimate the panicked signal that a cessation would have sent to the market, especially at a time when calm heads and responsible decisions were needed.
One area where there has been a less unified approach has been on the issue of short selling. Last week, regulators in France, Belgium, Greece, Austria and Spain extended their bans on short-selling until mid-May, while others in Holland, Portugal, Germany and the UK have chosen not to implement similar measures in their markets. Those in favour of this temporary measure have cited the impact that short selling can have in amplifying market sell offs, while opposing arguments say that this is an unnecessary intervention into capital markets and price formation. We are unlikely to see a consensus on this point before the crisis is out.
Part II will look beyond the crisis to explore some of the bigger themes and issues that will impact the market infrastructure world in the months ahead