Maintaining Open Markets in Times of Uncertainty

Maintaining Open Markets in Times of Uncertainty

In extraordinary times, functioning capital markets play a critical role in maintaining global economic stability. Christian Reuss, Head Cash Markets Swiss Stock Exchange and Member of the Management Committee, Securities & Exchanges at SIX, explains how the Swiss Stock Exchange ensures fair and orderly trading.

The Covid-19 pandemic has resulted in almost unprecedented uncertainty across economies and led to increased volatility in the global financial markets. Especially in March 2020 it has tested the operational resiliency of a number of systemically important financial infrastructures. Significant turmoil in financial markets can destabilize the financial system and, as a result, the economy as a whole. It is crucial that markets function seamlessly in such times: Open markets allow for fair and orderly price formation so that investors can react to the uncertainty they face.

If central financial market infrastructure was not operating, it would lead to the already increased levels of uncertainty and cause more damage: Investors would not be able to react to the events, could not accurately assesses the values of assets they hold and would be prevented from adjusting their portfolios to accommodate events as they unfold. This has an impact on the majority of our population who have investments in their pensions and savings which would suffer as a result. Therefore, the main focus of SIX is to ensure a functioning market infrastructure – including the Swiss Stock Exchange – to help the market and the investors who rely on it to weather the storm.

Swiss Stock Exchange: Volatility Boosts Trading Volumes to Unprecedented Levels

On the stock exchange uncertainty drives volatility and volatility drives turnover; a spike of uncertainty leads to a spike in volatility which leads to spike in turnover. In mid-March, volatility as measured by the VSMI spiked to more than 70% – many times over the average of the past (albeit historically less volatile) years. The increased volatility reflects the uncertainty facing stock markets and has led to massive reductions in asset values. This led to very high trading volumes on the Swiss Stock Exchange – and unlike  in January 2015, when the Swiss National Bank unpegged the Swiss franc from the Euro, this volatility persisted for several trading days rather than just being confined to a single day.

As result, we’ve seen several new records being established in March 2020, both in terms of trading turnover – up +80.9% on the previous month at CHF 293.0 billion –, and in terms of trades – increasing by +127.7% to a total of 17,399,685. These new all-time highs surpassed the previous ones by 61.3% and 127.7% respectively, established in January 2015 and February 2020.

A highly volatile trading environment usually leads to market participants opting for certainty of execution as opposed to seeking price improvements – a traditional dilemma. The non-displayed liquidity pool of the Swiss Stock Exchange, SwissAtMid, breaks with that tradition. The service allows users to achieve both – certainty of execution and price improvements – at the same time. In the second half of March, turnover in SwissAtMid exceeded CHF 1 billion in 11 out of the 15 trading days and yielded price improvements of more than CHF 8 million for market participants during this volatile period.

Open Markets to Best Weather the Storm

The events which unfolded in March 2020 are precisely the reason why our systems at SIX are calibrated towards peaks and not averages. Trading on the Swiss Stock Exchange remained fair and orderly at all times. Our system capacity has been coping very well with the large volumes and velocity of trading. Capacity usage was at its peak in the low double digits of our system’s threshold and we have had no outages or system issues. This applies not just to listing and trading businesses, but also to our best in class post-trade systems.

We didn’t just keep the Swiss Stock Exchange open because we technically could, we did it because we deemed it crucial to support the market in coping with the crisis situation and enabling investors to operate. Although there have been voices that advocated for shutting down markets, such suggestions seem counterintuitive and could even exacerbate the crisis further. The Philippines Stock Exchange in Manila – to name a current example – closed for 2 days and when it reopened, stock prices were down by around 30%. Closing markets would not remove the underlying cause of the uncertainty and volatility. It would only remove transparency around asset valuations and for investors the important ability to act which results in these effects multiplying when markets re-open.

We are consequently also of the opinion that price formation should not be interfered with to allow unbiased valuations to be reflected in them. We already prohibit so called “naked short-selling” – in the sense of selling with no ability to settle the contract if the seller is neither in possession of the security nor able to borrow it – on our market and our market controls suspend trading if there are significant price movements intraday. We oppose blanket short selling-bans since they can have a negative impact on real-time price formation. Finally, we believe it is important to the orderly functioning of markets that investors can adapt to changing economic views in a timely manner – including mechanisms such as short-selling – to smooth the impact of price adjustments.

SIX Provides Stability in Times of Crisis

March 2020 was – in many ways – an extraordinary month and it is impossible to predict what the near future will bring. On the positive side it showed that European financial market infrastructure providers can be relied upon in times of crisis. SIX continues to operate a fair and orderly trading environment to support the market: The Swiss Stock Exchange is open and supports market participants and investors to best cope with the current uncertainty.