Inside NYSE's response to the Covid-19 crisis

Author: John Crabb | Published: 1 Apr 2020
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Earlier this month, the New York Stock Exchange (NYSE) took the unprecedented step of temporarily closing its trading floor to help combat the spread of the Covid-19 virus. Two people in the premises had tested positive, so the exchange made the decision to switch to electronic-only trading for the first time since it opened in 1792.

As we enter the second week of electronic-only activity on the NYSE, IFLR's Americas editor John Crabb spoke with NYSE COO Michael Blaugrund about the challenges of operating the exchange without a physical trading floor.

Most market participants interact with the NYSE on a purely electronic basis on any normal day. "For the majority of our members the transition to that electronic configuration was relatively trivial. But we had two other specialised market participants who operate with human beings on the floor: designated market makers and the floor broker community," said Blaugrund.

Designated market makers, as the name would suggest, are those responsible for providing a two-sided market – come hell or high water – in intraday securities. Most of that intraday liquidity is provided electronically anyway, so that activity is normal. But they have the ability to inject human judgment in turbulent times, as well as being able to open and close securities either algorithmically or manually.

"In the electronic-only configuration, we are obviously restricted from human manual acts on the floor, so we have had to work closely with our market makers to translate as much as their activity as possible into the algorithmic expression," he said. "By working with those players we have been able to achieve this. Over 90% of all the open and closing auctions are now performed electronically. Their regulatory responsibilities and their liquidity provision responsibilities remains intact, even now in an electronic configuration."

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The floor broker community is of course the most significantly impacted. A lot of their value comes from the special capabilities that they provide their clients at the point of sale. They are unable to make those special-orders, such as verbalising interest, available to their clients. "As a result, clients have needed to adjust workflows and trading styles to adapt over the past week."

What preparatory steps has NYSE taken to prepare for this situation? Has everything worked as planned, and what are the biggest frustrations?

Everything has worked exactly as planned, which is a testament to the amount of preparation that the exchange team, and also the industry, has put into business continuity planning (BCP). The NYSE has re-platformed its technology over the last few years. The current incarnation has the ability to manage a disaster – whether that’s a natural disaster or a pandemic.

We are fortunate that we had those capabilities as a business requirement and have worked with regulators and our members to make sure that everybody is ready to implement those plans if necessary. I think it is something that we hadn't really anticipated: a time where everybody on Wall Street would be working remotely for an extended period of time.

It is really a testament to not only the resiliency of the exchange but the resiliency of industry that we have seen a very smooth transition from the model that we have operated in some respects for 228 years to an electronic-only model over the past week.

Is there a time limit for how long the exchange can function at this distance, or would it be able to go on indefinitely if necessary?

From a technical perspective there is no reason we couldn't remain electronic-only indefinitely. But what we have observed in the first week of trading is that the NYSE with the trading floor open is the highest-performing market model. The combination of the market maker's accountability to the issuer, plus the floor community interacting with the market maker, produces higher quality intraday trading and in particular, high quality auctions – so we are firmly committed to reopening the trading floors as soon as it is safe to do so.

michael blaugrund

There have been several examples of market-wide circuit breakers since the Covid-19 crisis began. Other countries and exchanges have taken steps to change their own rules as a result. Is there any plan to do this?

This is the first time since the modern incarnation of the market-wide circuit breaker was developed that we have seen one in practice. They were conceived as a mechanism to stop an avalanche of selling activity that developed over the course of the day, to give traders the opportunity to take a breath and let cool heads prevail, versus a condition where at 9:30am the circuit breakers trigger because futures were already signaling that the market was going to be down considerably.

See also: PRIMER: US market circuit breakers

It is likely that exchanges and other institutional market participants and regulators are going to evaluate whether it makes sense to adjust the protocol. There is a structured NMS plan to address extraordinary market volatility; it is the plan that governs the limit up-limit down programme for US equities. That plan includes self-regulatory organisations (SROs), the Securities and Exchange Commission (SEC) and advisory committees, who are looking at the current behaviour and making recommendations. Everybody generally agrees that it’s important for the rules to remain in place until a significant evaluation process is possible.

I imagine there were a number of companies due to go public in the time since the trading floor closed. How has NYSE responded to that and what impact has it had on the companies themselves?

All the companies that were looking at a late Q1 or early Q2 initial public offering (IPO) date are reconsidering their funding means. Almost all are pushing their IPOs back in the calendar. The trading floor is particularly well-suited for large and complex transactions, but we have the capability in our electronic-only configuration to execute an IPO. We actually did one on Friday, March 27, for a closed-end fund – the RiverNorth Flexible Municipal Income Fund (NYSE: RFM) – which was the NYSE’s first ever electronic-only IPO.

IPOs are possible, but companies are waiting for the uncertainty in the market to play out before they proceed. We believe in transparency of the trading floor. Any market participant can be represented alongside a major institution and that trading crowd is one of the reasons that companies choose to be listed on the NYSE. That is why we see the largest IPOs on the NYSE and why it is our core business, but in the short run while the floor is closed, we can still execute those transactions to ensure that the capital markets are available to our companies.

What difficulties did you face doing an electronic-only IPO?

We had to file some specific rules with the SEC to allow for some alternative communication. Typically, information about the order book is explained by the market maker to the trading crowd, which then relays that on to investors. Without the trading crowd present we have to use other mechanisms, including trader update emails to the broader investment community, so that they can better understand the state of the interest during the process.

How important is it to make sure that the exchange and the market stay open throughout this crisis?

We think it is critical that market participants have certainty about the rules of engagement at all times, but particularly during times of stress. Continuous liquidity is a hallmark of the US equity markets and assuring investors that they will have the capability to access their money is very important in maintaining confidence in the system. We have seen, historically, when other countries have suspended trading – or even in the US when a specter of a market holiday has been suggested  – that it amplifies panic. It is crucial that people continue to have confidence that the markets will be open to both express their investment thesis and to access their savings.

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