COVID-19: Why We Need to Stop Trading Now


Sunday, March 29, 2020   /02:30 PM / Amir Rezaee via LinKedIn* / Header Image Credit: Wired


In his speech announcing generalized confinement in France, Emmanuel Macron repeatedly called the present situation a war. The harsh restrictive measures implemented by the governments around the world could only be compared to past wartime episodes. The crisis that we are experiencing has been triggered by an exogenous cause out of the economic and financial sphere and has, as war does, overwhelmed the economy. The last few crises (2008, dot-com, 1987), occurred when a bubble in a segment of the market naturally burst, triggering a resource reallocation to alternative asset classes. Keeping markets open during such end-of-cycle periods enables the 'invisible hand' to reorient funds to neglected sectors during the bubble.


At this current time, markets are exposing the inability of our models to provide at least a kind of forecast of the future horizon of the economy. This is mainly because of the high number of unknown factors related to the COVID-19 outbreak. 


In such a situation of extreme uncertainty, the stock markets are not fulfilling their essential functions anymore.


Keeping in mind that their "raison d'etre" implies that they contribute:


a) to raise funds for the economy; and


b) to determine fair prices for assets


Visibly these two functions are completely out of order because of an exogenous shock that has derailed the system. No sane person goes to raise funds in an extremely volatile and bearish market, and this is why all IPO projects have been on hold for the last month. Most importantly, the markets are not currently providing fair prices. Efficient markets exist to enable prices to properly reflect information about future cash flows (I am not even getting into fundamental value here). However, during these unprecedented periods of massive uncertainty, should we trust the accuracy of the information available to market agents?


It is exactly because of the inaccuracy of the available information/analysis that during the two World Wars of the 20th century the authorities deemed necessary to close the stock exchanges of belligerent countries.* The exchanges remained closed until the agents disposed of enough quality information. Similar measures are even more urgent now, where more than half of trades are originated by algos which are solely based on the (inaccurate) available indicators, and naturally have no hindsight on the available, poor quality information used to trade.


Defenders of keeping markets open (for business or ideological reasons), justify it by bringing up its 'resilience', which for me is completely irrelevant. Beyond that, in financial markets, 'resilience' is a vague concept at best. The circuit-breakers stopped the markets from slumping below current levels now and not some intrinsic 'resilience'. We only need to look at the NYSE, rescued twice in two sessions (Friday and Monday) stopping the index (S&P 500) from dropping more than 7%.


This is why stock exchanges should be temporarily shut down ( a few days or weeks) to enable the system to recalibrate in these unprecedented circumstances.


*Periods of closing of exchanges during the two World Wars:


London stock exchange: July 1914-January 1915 and September 1-September 7, 1939.


NYSE: July 1914-December 1914.


Paris stock exchange: August 1914-November 1914 and Jeun 1940-July 1940


About the Author

*Amir Rezaee is the Head of Department of Finance, an Associate Professor of Finance and a Researcher. He heads the Department of Finance, Accounting & Management Control at Institut Superieur de Gestion (ISG Business School)


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