The World Federation of Exchanges (WFE), the global industry group for exchanges and CCPs, issued a guidance note, aimed at creating fair and orderly markets, in case there is a resurgence of market volatility due to the ongoing uncertainty caused by Covid-19.
During the first quarter, when countries across the globe went into lockdown, markets went into a tailspin. This prompted European countries such as Italy, Spain, France, Greece and Belgium to temporarily halt short selling on hundreds of stocks. In its guidance, WFE contends that if there is a repeat tumultuous performance, it is better and safer to maintain continuous visibility of asset prices and risk premia rather than suppressing markets.
Nandini Sukumar, Chief Executive Officer, the WFE said, “The concept of fair & orderly markets goes to the heart of public markets and the willingness to constantly improve them is part of the pledge exchanges make. It goes hand in hand with ensuring the integrity of markets. The quickest way to severely damage public confidence in markets is to leave participants uncertain as to when authorities might shut them without warning.”
She adds, “Similarly, bans on short sales deprive participants of information, making trading less orderly, not more. At a time when the banking channel is facing unusually challenging conditions, such moves would not just be sub-optimal for the economies that the markets serve. They would be outright counterproductive. We are publishing this Guidance Note so that no one need be in any doubt as to the issues at stake.”
The WFE guidance notes that central, public, regulated marketplaces provide the “only trustworthy, authoritative way” to allow price consensus to update in real time, providing policy makers as well as investors and issuers with valuable information.
It adds that this is especially true when the price moves are extreme. Intermediary market makers help this process, maintaining their own viability by exploiting the highly granular data licensed to them by exchanges. In other words, the system is built to process inevitable changes in price.
In addition, the WFE argues that central markets provide a safe, reliable channel through which new offerings can come to market, allowing the economy to continue to evolve while reducing levels of indebtedness and leverage. In June 2020, companies raised over $31 bn through IPOs – one of the highest monthly amounts observed in recent years.
The WFE is currently working on several other issues related to this year’s market activity, including the role of CCPs in adjusting to changed levels of volatility; the structure of volatility control mechanisms (notably circuit breakers); and the importance of supporting issuers of securities in times of uncertain economic outlook.