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SEC, Nasdaq Chiefs Say Markets Can Handle Volatility, Should Stay Open

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As the CBOE Volatility Index rose sharply Monday  nearly 43%, ending the day at 82.60 and surpassing its 2008 peak of 80.86  regulators stressed that the equity markets should not be shuttered. 

Securities and Exchange Commission Chairman Jay Clayton said Monday that the stock markets need to remain open despite fears tied to the coronavirus and the associated economic fallout. 

“Markets should continue to function through times like this,” Clayton said in an interview with CNBC before the markets opened. Clayton added that the SEC has been in touch with other financial institutions.

He spoke a day after the Federal Reserve cut its benchmark interest rate by a full percentage point to almost zero and pledged a return to quantitative easing via the purchase of at least $700 billion in Treasury and mortgage bonds.

Nasdaq CEO Adena Friedman agreed with Clayton’s views. “It is critically important that the markets stay open at this time, as opposed to trying to take breaks in the middle,” said Friedman in an interview with Bloomberg Television. “I think that’ll just push off the situation a little bit, but actually could create other pent-up issues.” 

But some market watchers disagreed. Following the Fed news and the weakening of U.S. equity futures, Jim Bianco, President and CEO of Bianco Research, said in a blog post: “If risk markets make new lows, regulators and government officials may have no choice but to close the financial markets to prevent chaos and lasting damage.”

‘Much Stronger Position’

At the opening bell Monday, U.S. equity markets fell more than 7%, triggering circuit breakers to halt trading. Stocks remained lower in afternoon trading, with the S&P 500 index down 9% to 2,466.

“Over the past two weeks of a very volatile time,” the markets have functioned well, Clayton said. 

In contrast to conditions during the financial crisis of ‘07-’09, “I think our banks are in a much stronger position today …,” he said. “This is a demand and supply shock.”

But, according to Bianco, “Should stock prices fall to new lows and corporate bond prices decline accordingly, it risks chaos in financial markets.”

As margin calls lead to involuntary liquidation, it becomes harder to “properly price illiquid securities like high-yield bonds and emerging market securities,” which then could prompt funds to stop redemptions. 

“Regulators and government officials would be left with no choice but to close markets until the full extent of the economic damage could be determined and properly priced,” he said. “This might be a prolonged shuttering of many weeks, akin to what is unfolding in the broader economy.”

Over the past 110 years, Bianco says, the New York Stock Exchange has only closed four times for reasons not related to poor weather or infrastructural failure: from July 31 to Dec. 12, 1914, during World War I; from March 3 to 15, 1933, for a banking holiday; from Nov. 22 to 26, 1963, after President John F. Kennedy was assassinated; and from Sept. 10 to Sept. 17, 2001, following the terrorist attacks.

— Check out Stocks Resume Plunge, Unfazed by Fed Rate Cut on ThinkAdvisor.


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