Why Aren’t Exchanges Open?

One thought occurred to me yesterday, with electronic trading, why aren’t exchanges open?  One of the virtues of electronic trading is that it’s virtual.  Greg Harmon wrote an excellent piece on the topic.  Like him, I feel for everyone caught in the storm’s path.  But, the world of finance is 24/7.  It’s also electronic.  That means it never sleeps.

My trading career has spanned a lot of moments.  The 1987 crash, a couple of wars, the 1998 LCTM disaster, and 9/11.  During 9/11, exchanges shut down.  I recall being on the floor and after the jets hit the towers I thought about the strategy of having people concentrated in one area that were responsible for a huge amount of world finance.  It seemed silly to me.  Here we were, trading the most liquid short term debt contract in the world, and if a bomb went off in the room, what then?  Surely, a disaster like 9/11 would be the impetus for electronic trading.  There was just too much risk concentrated in one place.

In the ensuing years, electronic trading has taken off.  But it’s not because of risk.  It’s just because the centralized powers have figured out they can make more money off of electronic trading than they could have when it was done manually on a trading floor.  Exchanges pushed it because they could make more money off the box than hand signals.  No biggie, microeconomic principles rule.

But, with the big switch to electronic trading, the markets should be open.  There is no excuse for them to be closed.  Greg says,

Every major investment bank has traders with remote access and facilities and office across the country. So why did we not open Monday? I actually heard Duncan Neiderauer, CEO of the NYSE, tell CNBC that he was comfortable closing because he did not want to have his first live production test of Arca carrying the full load of trading to happen Monday. Serious questions come to mind on that one. Would it truly be the first live test? That in itself is scary. I don’t believe it. But go further, why not try it and if it does not work after 10, 30, 60 minutes cancel the trades if it does not work. That is what would have happened in the America I grew up in. We have mini events like this weekly. Wussies. Many, many investors placed their faith in a system that would be rock solid. Open daily. Did the retail or institutional investor get consulted about the closure or just the major investment banks? Don’t get me wrong, I am not a proponent of asking people to move into harms way. but I was in San Diego Thursday when they reported on the local television there that the Hurricane was coming. Did nobody take action? Were all the senior executives at all these firms asleep at the wheel, or are they always asleep. There was plenty of time to fly traders to Chicago, Dallas, Los Angeles, or where ever to deal with the circumstances.

Amen.  It just goes to show that since the crash of 2008, and the passage of Dodd-Frank, we haven’t learned a thing.  We have too much risk concentrated in too few places.  Too big to fail is a bad policy.   There are traders all over the world and redundant electronic systems set up everywhere.  There is no reason not to be open.

Before east coasters go ballistic and tell me I am heartless, ask yourself this.  If there were a major snowstorm, or a massive earthquake that caused the center for world risk management to be shut down, Chicago, would exchanges in New York shut down?  Chicago exchanges have back up plans and they’d be open for electronic trade.

Markets are interconnected like never before.  Natural disasters are going to happen. Earthquakes, tsunamis, hurricanes, cyclones.  Manmade disasters are going to happen as well.  Terror attacks, wars, and computer malfunctions.  The financial figureheads have a responsibility to be open.  Markets need to be open to work.

It’s understandable why places like the CME ($CME) and CBOE ($CBOE) shut down.  Without a yin, there can’t be a yang.  But one thing people should realize is that capital flows in and out of all market segments throughout the trading day.  Computers can microanalyze second by second trading patterns and allocate capital from the stock market to the gold market to the cattle market in seconds.  Even though they are unrelated in physical terms, they are all interrelated when it comes to monetary terms.  World market volume decreases when one leg is deliberately shut down.  Shutting down increases risk and increases costs.

I feel for the people on the east coast.  Water is a terrible thing to deal with.  I know.  In August of 2001, my house was destroyed by water while I was on vacation.  Rebuilding the damage will not be fun.  But the market is bigger than all of us.  They should be open.


Maybe it’s because quant hedge funds are headed toward their worst performance since August 2007, heh.


DG_Downey tweets, ” Trading has gone electronic but the massive back office operations have a way to go. Putting those people in harms way.”.  A fair point.  But like Greg said, it’s not as if no one knew about the storm.  There was plenty of time to shift human resources.

Thanks for the link Instapundit

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