A man wearing a face mask walks past a bank's electronic board showing the Hong Kong share index at Hong Kong Stock Exchange Wednesday, March 25, 2020. Photo: AP
by SCMP Editorial
by SCMP Editorial

Market suspensions are doomed to fail in today’s trading world

  • As politicians the world over react to the slump in equities caused by the coronavirus pandemic, the final say rests not with floor traders but the latest technology
After several days of what traders may call “a dead cat bounce”, global shares have again been routed. Capital markets are responding to news that the pandemic is worsening with rising death tolls in the United States and other countries exceeding that of China while the world economy has entered a recession.
Equities markets cheered briefly when leading central banks introduced unprecedented monetary easing to support their economies v while governments, including that of Hong Kong, are loosening fiscal purses. But even before the latest grim news, there was scepticism as to whether Western countries could afford to take on such a large expansion of public debt on their balance sheets.
China may have been expected to take up the slack and help with global growth, as it did in the last global financial crisis. But given the already heavy debt the central and local governments have amassed over the past decade, B eijing has been far more cautious in launching rescue packages. No one should expect the same largesse of more than a decade ago.

The latest equities decline in allthe main markets follows the worst quarter since the global financial crisis. In such circumstances, investors, bourse operators and policymakers need to keep a cool head. When markets crash, there are always politicians who cannot resist the temptation to halt trading.

For over a week last month, the bourses of Manila and Colombo suspended trading intermittently, with predictable disastrous results. Not only did they not stop panic selling, they accelerated it when markets reopened.

The desire to do something, anything, to stop the panic is understandable among politicians. But there is more than market psychology at work. What one person calls panic selling, another may consider a rational dash into liquidity. After all, bond, stock and major commodities markets, such as oil and gold, fell together in recent weeks, so cash became the only certain safe haven.

Of course, in less liquid markets in developing economies, the bottom could fall out. In most developed markets, you can almost always count on central banks to have your back. In the US, for example, the Federal Reserve has reintroduced unlimited quantitative easing, or QE infinity.

The structures of contemporary markets have changed profoundly, thanks to technology. Today, most trading in major exchanges is automated by computers. While algorithmic, especially high-frequency, trading can exacerbate market swings, “panic” is not a word that can adequately describe computers.

Before, a natural disaster or war could disrupt physical floor trading. Today, when trading can be done entirely online, there is even less reason to suspend it. When the market needs to find its own level, you cannot change its course even if you try.

This article appeared in the South China Morning Post print edition as: Market suspensions are doomed to fail in today’s trading world