The New York Stock Exchange (NYSE) will move to electronic-only trading today for the first time in its history. The change is due to concerns about employees working on the trading floor contracting and spreading COVID-19.
NYSE is the largest stock exchange in the world, as judged by the total market capitalization of the companies listed there. Nasdaq, the second biggest, doesn’t have a physical exchange floor at all. Most NYSE trades don’t even go through the floor – they are processed electronically in New Jersey. So, why is this change significant?
NYSE operates differently than electronic-only trading markets. Its rules give some advantages to traders on the floor. Designated market makers, special traders that are intended to make trading fair and orderly, also provide extra insight about what is happening on the market.
Many financiers question how much of a difference these human elements make. Some claim that it’s nothing but marketing. Remote employees could carry out these tasks, maybe even algorithms, the argument goes.
Whatever the actual effect of human workers at NYSE, the strategy seems to be working. Not only is it the biggest stock market as noted above, but it also attracts more initial price offerings (IPO) than its competitors. The old behemoth has lost market share in recent years, but it is still the destination of choice for new companies looking to float shares and raise funds on the open market.
Some have also asked why markets need to be open at all, trading floor or not. It’s easy to see stock prices falling and wonder if shutting down markets would be better during the worst part of the pandemic.
There are two main reasons why shutting down markets would be a terrible idea. First of all, losses would probably be even greater once reopened. A market closure in Greece in 2015 resulted in a 16% drop the first day trading resumed. Second, markets are a vital source of both funding and liquidity. Organizations of all kinds need cash during tough times. Selling assets on open markets is one way to get it. Denying that possibility risks making the crisis worse.
Many IPOs, mergers, and buyouts have already been put on hold: Xerox delayed its takeover of HP and Warner Music its IPO, just to name a couple. These big transactions are still the best way we have for getting money and resources to those who need them. Closing markets would only delay more such transactions. Alternative methods, such as bitcoin, aren’t ready yet, and it’s not clear if they ever will be. The value of bitcoin has fallen faster than that of the market as a whole. This quickly shot down the theory that bitcoin will be a safe haven asset in times of crisis.
With no real alternative for keeping money flowing, the markets we have are the best option. It’s not business as usual, but it will hopefully be enough to give everyone the resources needed to keep economies churning out goods, including those crucial for combatting COVID-19. NYSE traders will now have to do their work remotely, but the hope is that the benefits of that work will be enough to keep the economy off life support.