Coronavirus is restricting market efficiency

Traders work before the closing bell at the New York Stock Exchange on Aug. 14, 2019 in New York City.

JOHANNES EISELE | AFP | Getty Images

Last week was marked by a series of trading halts as stock markets swung from “limit down” to “limit up,” and the Dow Jones Industrial Average posted its worst single-day loss since Black Monday in 1987. Uncertainty abounds, but one thing is for sure – no one knows what is going to happen next.

It’s time that stock markets were shut for two weeks to allow the business community to adjust to the new reality brought on by this unprecedented global health emergency.

COVID-19 poses a major logistical challenge for the financial industry. Global banks and investment funds have been scrambling to test and implement contingency plans involving use of satellite offices outside central London and New York.

So far, things are going smoothly. Jim Casey, co-head of global investment banking at J.P. Morgan, told CNBC that clients cannot even detect the difference between sales people and traders who are working from the bank’s headquarters versus their back-up sites.

But what if the situation escalates and those employees have to work from home? That’s uncharted, untested territory.

Beyond the logistics, the high level of uncertainty is preventing financial markets from functioning efficiently.

At the macro level, Federal Reserve Chair Jerome Powell ditched quarterly forecasts, remarking in an emergency press conference Sunday night that, “actually writing down a forecast in that circumstance didn’t seem to be useful and in fact could have been more of an obstacle to clear communications than a help.”

At a micro level, companies are busy devising and implementing contingency plans, which means less frequent and less meaningful dialogue with investors.

Given the universal and biological nature of this crisis, efforts to be opportunistic, take advantage of the volatility or shop for bargains in the market are likely to prove futile until more is known.

The pushback to closing markets is that companies need access to capital. Further, if investors anticipate a halt to trading, there would likely be panic selling.

U.S. Treasury Secretary Steve Mnuchin argued on CNBC last week that markets are working in an orderly way. He called rumors that markets could shut “ridiculous”. But is it ridiculous? It’s happened before.

Previous closures

Markets were closed for two days after Superstorm Sandy hit in October 2012. Initially, trading at the New York Stock Exchange was set to go fully electronic after lower Manhattan was deemed unsafe.

But with much of Wall Street grappling with logistics challenges of their own, regulators felt uneasy going ahead with the plan so shut markets altogether. Trading also ceased following the September 11 terror attacks, with markets shut until September 17.

Before Black Monday in 1987, people likely thought the concept of circuit breakers was ridiculous. Now they are part of the fabric of financial markets and kick in temporarily whenever a market moves too far in one direction.

Italian and Spanish securities regulators issued short-selling bans on more than 100 stocks last week after a brutal sell-off. Bans on short selling were also applied in some Asian markets.

How many times will the circuit breakers need to be triggered for governments and policymakers to seriously consider shutting markets? Two weeks might give everyone a chance to focus on the underlying problem.