After a couple of weeks of temporary trading halts and soul-sucking sell-offs — including Monday’s rout — have you wondered whether we’d be better off shutting down the stock market, at least until the coronavirus crisis eases? It would be a pause, a chance to calm down until we have a better handle on the pandemic’s impact on the economy.
You’re not alone. Enough people are asking the question to prompt a response Monday from the New York Stock Exchange.
“While we are deeply conscious of, and sympathetic to, investors’ concerns around price declines, the market is a reflection of the larger uncertainties that everyone is experiencing during these challenging days,” NYSE president Stacey Cunningham said in a statement, as the Standard & Poor’s 500 index was headed toward a 12 percent drubbing, the third-worst day on record, after the crashes in October 1987 and October 1929.
“Closing the markets would not change the underlying causes of the market decline, would remove transparency into investor sentiment, and reduce investors’ access to their money. This would only further compound the current market anxiety,” she said.
Of course, the exchange would say that. The NYSE has rarely shut down outright in the nearly 230 years since two dozen traders got together under a buttonwood tree on Wall Street and agreed to form an exchange. Not in the depths of the Spanish Flu pandemic of 1918-1919, not in the wake of that 1929 stock market crash or throughout the Great Depression and World War II, and not during the 1987 crash.
Because, for everyone who’d rather not stomach the turmoil, there are others who see opportunity in confusion. Remember how George Bailey explained it in “It’s a Wonderful Life”: “Potter isn’t selling. Potter’s buying! And why? Because we’re panicky and he’s not. That’s why. He’s pickin’ up some bargains.”
But it’s not just the Mr. Potters of the world who don’t want to see the market go dark in times of, well, financial darkness. There is more than greed at work here.
“The fact that you don’t like the price is no reason to stop trading," said James Angel, an associate professor and markets expert at Georgetown University’s McDonough School of Business.
The financial markets provide crucial information by bringing together investors to form a consensus around the fair value of an asset — whether that’s an airline stock, a US government bond, or a barrel of crude oil. This is especially important during turbulent times, when investors can have widely divergent opinions on what the future has in store for the economy and corporate earnings.
Without trading, investors can’t put their ideas into action, prices get stale, and we actually understand less than we would have if the market had stayed open. The stock market is essentially a public utility, and we know how angry people get when their cable TV goes down during the big game.
Markets also provide liquidity — a fancy term for cash — to businesses and individuals. Say you find your bank account low when the kid’s tuition bill is due. You could sell stock to get the funds. A business might do the same during a pinch to keep operating.
If the market is closed, you’re out of luck.
"To get in the way of that mechanism seems to me to exacerbate the problem,” said Chester Spatt, a finance professor at Carnegie Mellon University’s Tepper School of Business. "The uncertainty is real, and it doesn’t go away if you don’t allow people to trade.”
So, when has the NYSE not opened? Most recently, on Sept. 11, 2001, when terrorists flew planes into the World Trade Center, killing thousands and destroying buildings in the heart of New York’s financial district. The NYSE reopened Sept. 17.
The longest NYSE shutdown was four months, at the start of World War I in 1914, when European governments needed cash and the NYSE wanted to prevent a massive run on the market.
Following the October 1987 stock market crash, regulators and exchanges implemented what are known as circuit breakers to pause trading in all stocks after big swings up or down. The rules were later revised, and since 2013 there have been three levels of market-wide circuit breakers.
When the S&P 500 drops 7 percent, trading is halted for 15 minutes, and if the decline reaches 13 percent, trading stops for another 15 minutes. If the benchmark tumbles 20 percent, trading ends for the rest of the day. There are also limit up/limit down rules that suspend trading for five minutes in individual stocks once they trade outside a price band.
We’ve had three level-one circuit breakers in the past week, including on Monday; if trading had gone on a little longer, the S&P 500 might have hit level two, as prices were falling through the 4 p.m. close. There has never been a level two or level three shutdown under current rules.
Let’s compare a market shutdown to a bank run, when depositors try to take out all their money because they fear the bank is about to collapse. Closing a bank to avoid a run makes sense, said Itay Goldstein, a professor of finance and economics at the University of Pennsylvania’s Wharton School.
“When people withdraw money from a bank all at once, it hurts the bank,” leaving it without cash to make loans or meet regular withdrawals, Goldstein said. “That’s why a bank holiday makes sense.”
But when investors sell stock, the shares remain in the market. The NYSE and its ability to process trades isn’t hurt.
“The case for closing markets is less compelling than a run on a bank,” Goldstein said.
The S&P 500 is down nearly 30 percent from its Feb. 19 peak. That’s a painful plunge, taking the index back to where it stood in May 2017.
During the last bear market, the S&P 500 dropped 57 percent from October 2007 to March 2009. The NYSE opening bell rang every trading day at 9:30 a.m.
Larry Edelman is a Globe columnist. He can be reached at email@example.com.