BackShould the stock market be shut until Covid-19 restrictions are lifted?
Volatility rules, but if there are participants who value liquidity more than the right price, they should not be blocked. It is left to the others who can willingly give up their liquidity to benefit out of such a situation.
PremiumThe Maharashtra government has progressively tightened restrictions on work and travel in Mumbai over the past week. On Tuesday, Prime Minister Narendra Modi placed the entire nation under a lockdown for a period of three weeks. However, certain categories of services such as the financial markets continue to operate. As the stock market collapses in response to the economic fallout of the Covid-19 pandemic and as market participants face difficulties in their operations, we asked experts if it is better to shut the market till the restrictions are lifted or keep it going.
Aashish Somaiyya, CEO, Motilal Oswal Asset Management Co.
The function of the markets is to weigh all factors, give a quote and provide liquidity. Markets’ ability is hampered when there are too many unknowns. If one has a quarrel with the fineness of quotes, one has the choice not to transact on such quotes. Volatility rules, but if there are participants who value liquidity more than the right price, they should not be blocked. It is left to the others who can willingly give up their liquidity to benefit out of such a situation.
When the bomb blasts occurred in Mumbai or during 9/11 attacks, the markets were closed for a day or two because of the impossibility of operating in the line of fire. But closing markets for extended periods would mean closing the doors to investors who are headed for exit or depriving the ones who want to enter.
There is a valid argument of the health hazard. We need a few people to ensure transactions and IT infrastructure functions. With social distancing and sanitization, a few critical people are doing that task even as the rest are operating from home.
Sivananth Ramachandran, CFA, and director of capital markets policy (India), CFA Institute
Closing the markets is an understandable but not a well-thought-out reaction. The fall reflects a desire for liquidity among market participants during a crisis, but it also reflects the reality of destruction in demand and supply across a vast swathe of industries, collapse of incomes and livelihoods, limited fiscal capacity and uncertainty as to when this will end. Closing the markets will not change that reality.
Closing the markets will not completely halt price discovery either—trading will shift to SGX and other exchanges which offer Indian index futures contracts, and their attractiveness will remain high long after the Indian markets reopen.
There are risks associated with the current market panic. There is the risk of market errors due to overwhelming volumes—our clearing and settlement systems have been tested through other crises before, but it’s a factor. Indian stock exchanges have allowed traders to work from home, and globally exchanges have removed “open-outcry" pits, wherever present. Market making might fail in uncertain times as we’ve seen with stress in certain market segments. Innovations, including even the central bank as the market-maker-of-the-last-resort might be needed.
In times like these, it is even more important to have a high level of transparency and high-quality information readily available to ensure investors can make informed decisions. Closing the market for any length of time will send the wrong signal.
V. Ramesh, managing director and chief executive officer, MF Utilities India Pvt. Ltd
The government has announced a 21-day lockdown exempting certain categories. A large number of companies associated with stock exchange activities have announced work from home, but they need specific people, especially IT personnel, to visit offices often to ensure the infrastructure is functioning. Though exempted on paper, such personnel are not allowed to travel. This puts severe stress on people and systems which may lead to a breakdown, thereby harming the interests of the investors, particularly at a time when the market is finding new lows every day.
Such a lockdown will surely have an impact on the economy, which has already been built into the current pricing of the market after the steep fall. Considering this, no major impact is seen on any aspect such as pricing and liquidity. There are many activities which were considered impossible to shut down, but they have been shut down without much impact as perceived. Also, we need to realize that the number of people who are working in all the affiliated activities is high and, hence, need to evaluate whether or not keeping the exchange open is worth the risk we are taking for all those who are connected to it.
Sandeep Parekh, partner, Finsec Law Advisors
The markets are a reflection not just of the past, but also a mirror of the success of the companies in the future.
Hiding this crystal ball because it is showing an unpleasant future is like hiding a thermometer because you have high fever. It will actually provide false comfort that you are healthier, even though your symptoms are getting worse.
The market allocates risk, values companies, feeds into other markets like the money market and mutual funds, is a means of compensation, enables a smooth sloshing around of money across borders at microsecond speeds and provides exits. Any threat of closure will bring investors closer to the exit doors.
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