Stock markets not immune to closure as regulators seek to limit Covid-19 rout

23 Mar 2020 7:20 pm by Fiona Maxwell

The financial services industry is scrambling to persuade policymakers around the world that there is no need to close markets, despite daily tumbles in stocks. But their fate may have already been sealed.

The Covid-19 crisis is resulting in daily falls in equity markets, as governments around the world order businesses to shut up shop. A move from the UK’s financial-services regulator on Saturday evening to halt companies reporting their preliminary results has struck fear that this could be the prelude to a full-scale closure of stock markets — or at least a curtailing of hours.

EU and UK regulators have, for the most part, sided with industry associations that markets should remain open. But many have added that caveat that trading must be “orderly.”

Bank of England Governor Andrew Bailey said on Thursday that policymakers “must do everything we can to allow markets to be orderly and to perform their intermediation and market discovery function”.

In the same breath, however, he warned that markets were on the brink of becoming “disorderly.” And in the new crisis-hit world, four days is a long time.

It was just two days later — carefully timed on a Saturday evening to avoid upsetting markets — that the Financial Conduct Authority wrote to companies it believed were intending to publish preliminary financial statements in the coming days, “strongly” requesting that they abandon plans to do so.

If the stock market continues to decline, shutting down or curtailing exchanges would be the logical next step for the UK authorities.

The FCA’s counterpart in the EU appears to have reached similar conclusions. The head of the European Securities and Markets Authority, Steven Maijoor, said his preference was for open markets but hinted that the regulator could curtail trading if markets became disorderly.

“ESMA’s objective is to maintain markets that are open and orderly, as they are vital for the functioning of our economy and financial system,” he said. The regulator “is prepared to use its powers to ensure the orderly functioning of EU markets so that they benefit investors and support stability.”

Never say never

While policymakers are clearly wary of what would be an unprecedented move to step in and close global stock markets, no one is willing to completely rule it out. In the US, Treasury secretary Steve Mnuchin has conceded that there may be a point when hours need to be shortened, even if there is no intention to close markets completely.

The BOE’s Bailey, who is new in post following his almost four-year tenure as head of the FCA, has already taken a lead in the UK’s economic response to the pandemic. On 19 March 2020, he acknowledged that taking anything off the table “would be foolhardy of me”.

The regulated are certainly panicking, with various calls to their supervisors to not take the drastic step. The World Federation of Exchanges argues this isn’t the time to introduce further uncertainty, while 10 industry associations representing all parts of the financial sector in the EU, and 16 in the US, urged their policymakers to keep markets open and issue a joint statement to that effect to boost investor confidence.

They argue that markets already have in-built safety mechanisms, such as circuit breakers, that will kick in and temporarily suspend trading in an extreme downturn.

Closing doors

While a joint statement from finance ministers, central bank chiefs and prudential regulators would certainly instill some calm in the markets, the unprecedented challenges presented by Covid-19 suggest that any calm would likely come before yet another storm.

Regulators can issue statements, implement short-selling bans and request companies take additional measures, such as postponing financial statements. But with every new day of trading, stocks take a battering, and it could be a case of when — not if — markets will see their doors forcibly shut.

There’s also the human element to consider. While traders are working from home, some may still fall sick and need to stop work. Companies might then have no choice but to at least shorten hours — which may end up being the compromise solution.

Industry groups, and even policymakers, will do everything within their remit to prevent that from happening. But as with all responses to this new crisis, nothing can be out of the question.

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