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
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.