As U.S. equity markets opened and resumed trading last
Wednesday, the impact of Superstorm Sandy began to dissipate.
Opening auctions ran smoothly. Trading volumes were high, but
not unusually so. Share-price volatility was normal. Behind
closed doors, however, U.S. exchange operators were still
discussing the market-structure issues revealed by the massive
storm, which halted trading in U.S. equities for two days
the longest weather-related closure since the blizzard
Although the decision to shutter the market was reached by
industrywide consensus late on Sunday night, before the storm
hit, the responsibility for the shutdown was not shared equally
among U.S. exchange operators. Nasdaq OMX, which operates fully
electronic trading platforms, had been ready to open on Monday.
BATS Global Markets, which also operates electronically
and is headquartered in Lenexa, Kansas was prepared to
open its electronic exchanges for trading on Monday, too. But
NYSE Euronext, the operator of the much-vaunted New York Stock
Exchange, hesitated to open its floor-trading operation on Wall
Street and risk endangering staff.
NYSE did have a business continuity plan in place, which it
fully intended to set in motion on Monday. The plan, according
to Joe Mecane, head of U.S. equities for NYSE Euronext, was to
close the trading floor and operate exclusively on Arca, the
exchange operators electronic trading platform. Almost as
soon as NYSE announced its plan to its member firms, however,
the pushback came hard and fast, say industry sources. The
proposed switch apparently caught some broker-dealers by
surprise and would have required them to send their own
programmers into the city to reconfigure order-routing software
on Sunday night, even as the winds rose and the subway system
closed a prospect that caused considerable alarm.
I think the fear came from two things, says
Mecane. The fact that this was the first time NYSE would
be implementing its electronic-only disaster recovery plan in a
live production environment and the fact that people realized
that wed made a decision that it was not advisable to
send people into downtown Manhattan.
Faced with open revolt by some of its member firms on Sunday
evening, NYSE in conjunction with the broader exchange
community decided that the potential threat of opening
to disorderly, volatile trading on Monday was simply too great.
Part of the difficulty, say market experts who were privy to
the discussions, was that so many broker-dealers were
unprepared for the change of venue and worried about their
ability to connect and participate in opening stock-price
auctions. NYSEs rivals were not entirely confident that
the opening auctions would run smoothly on Arca, either, and
after a summer of technological mishaps and trading
glitches were reluctant to risk any hint of structural
disorder. With the industrys reputation in mind, even
NYSEs fiercest competitors, Nasdaq and BATS, agreed to
the Monday closure.
We were ready in all regards, along with the other
electronic exchanges, but in an interconnected market
it didnt make sense for just part of the market to
be open, says Chris Isaacson, chief operating officer of
BATS Global Markets. The real concern in the exchange
community focused on peoples safety and the functions
that NYSE performs in running opening and closing auctions.
NYSE also manages the intraday volatility around those, because
single-stock circuit breakers are still the responsibility of
the listing exchange to send out.
NYSEs reprieve didnt last long, however.
Although the U.S. equity market remained closed on Tuesday,
NYSE, Nasdaq and BATS were busy running extensive tests that
day to make sure that the markets could open smoothly again on
Wednesday even if NYSEs physical trading floor
still wasnt operational. Had its trading floor remained
closed, NYSE would have implemented its original disaster
recovery plan and run opening auctions on Arca. But the
exchange operator managed to get the trading floor reopened in
a Herculean effort, and trading resumed as normal on
Although U.S. equity markets have been functioning smoothly
ever since, questions are still percolating in the exchange
industry about the way that future crises ought to be handled.
The irony is that the exchange industry had a chance to test
its collective preparedness just a year ago, with Hurricane
Irene, which was downgraded to a tropical storm by the time it
clipped New York. Unlike Sandy, Irene didnt cause any
major damage to New Yorks infrastructure, but its
presence heightened the exchange industrys sense of
urgency around the need for adequate disaster recovery
We had this discussion amongst the exchanges and
regulators about Irene, last year, and made it clear to all
parties that the market should never be beholden to lower
Manhattan and its accessibility, says BATSs
Isaacson. But it is apparent in hindsight that some of
the contingency planning was simply inadequate. Nonetheless,
given the circumstances and the facts at hand, I believe we
made the right decision, collectively, to close the market.
However, I hope that preparedness is better next time so we can
Suffice it to say that this may be the last time that U.S.
equity markets close for such an extended period of time due to
a single, regional weather event. Although it may be premature
to guess about the changes that may emerge in Sandys
aftermath, it seems likely that tighter coordination between
exchanges and their member firms will become a necessary, if
not mandatory, part of modified business contingency plans.
Other changes may be subtle but no less significant, says
Isaacson, including the possibility of running opening auctions
on an alternate exchange should an issue arise with any single
listing exchanges ability to open. The details have yet
to be discussed, but Eric Noll, head of transaction services
for Nasdaq OMX, concurs that, in the aftermath of Sandy,
business continuity plans across the industry will have to
become much more robust.
Coming out of this, people are going to look at Sandy
and ask, How can we be better prepared for another storm
of this magnitude? says Noll. Over time,
Nasdaq OMX has worked closely with our member firms to test our
business continuity plan; as an industry, we must ensure the
integrity and robustness of our markets.
The lingering question that NYSE is not yet prepared to
answer, however, is the impact that Sandy could have on the
future of NYSEs traditional floor-trading operation. At a
time when rival stock exchanges can function smoothly
irrespective of their location, NYSEs dedication to its
floor-trading model in lower Manhattan seems like its
competitive Achilles heel possibly admirable, but
undeniably costly and anachronistic.