Closing stock markets is not the answer
Short selling bans in several European countries have led to fears that regulators may move to shut down stock markets altogether if the turbulence caused by the spread of Covid-19 worsens further, but this would be a serious mistake.
London and New York’s stock exchanges have closed before, at the outbreak of each world war, although both eventually reopened during the conflicts.
In the case of the US, the reopening quickly led to a new bull market as investors realised that American companies could profit substantially from financing the war effort and supplying the UK and her allies with goods.
The spread of the coronavirus pandemic has erupted into a global crisis, leading to some of the most severe restrictions on civil liberties since the Second World War.
With entire countries on lockdown, including the UK as of Monday night, markets are trying to make sense of both the threat of the virus and the effectiveness of the unprecedented governmental and central bank response in staving off the human and economic cost.
Certain markets are already showing signs of strain due to restricted liquidity. Dollars are expensive to get hold of and corporates are drawing down on revolving credit facilities to shore up their balance sheets.
However, in times of extreme stress, it is more important than ever that markets function. Any closures of major developed stock markets would create panic as investors would no longer be allowed to participate in normal price discovery.
So far, only the Philippines has taken the drastic action of closing its stock exchange. When it reopened, prices plummeted — the benchmark PSEi Index fell by more than 24% in a morning.
Regulators in other countries, such as France, Belgium, Spain and Italy — one of the worst-hit countries — have enacted bans on short selling, but have stopped short of full market closures.
The Covid-19 crisis is unfolding at a pace so fast it makes one day's assumptions invalid by the following morning. But stock markets have largely reacted rationally to what has been a torrent of bad news and tremendous uncertainty about what lies ahead.
The UK’s Financial Conduct Authority has ruled out a short selling ban, but it has asked companies to delay releasing financial statements to give them more time to offer sound guidance to investors.
One of the main risks of shutting down equity markets entirely is that it creates huge problems once it is time for them to reopen. Owners of stock deprived of a chance to lower their exposure form a mass exodus and pandemonium.
Closing the markets would also deprive a lot of companies of the recourse to financing via the equity capital markets, which is an important and often final resort for distressed companies.
Closing bourses would symbolise a failure of regulators to preserve any sense of normality and would exacerbate the dysfunction already rocking markets to potentially lethal levels. They must stay open, no matter how violent the trading.