It was front page news in the Wall Street Journal. For three long hours last week, there was no trading on the Chicago Board Options Exchange, the home of S&P 500 stock index options and the Vix volatility index. The Journal quoted a trader: “It was very, very unnerving”. Risks went unhedged. Experts worried about the effect of a more grievous software fault on an even more important exchange. What would happen then?
Almost nothing. Imagine a worst case scenario: a hacker closes down all the exchanges for a full month. All portfolios of stocks, bonds, options, futures, currencies and commodities are exactly the same on June 1 as on May 1.
What would the outage change? The prices at the end of the “exchange holiday” would presumably be about the same as they would have been otherwise. The lost income of brokers and traders with superior insight or information would be matched by the foregone losses of their counterparties. As for the economy, a few new issues of bonds and shares would have been delayed a few weeks, but the losses would be more than matched by gains: the absence of frenetic trading would remove a significant distraction for business people.
If that sounds like an improvement, take a miniscule modicum of comfort. Regular financial market holidays are likely to be introduced in the hyperactive foreign exchange market. EBS, which runs one of the big forex trading platforms, plans to force traders to take regular breaks. Admittedly, the R&R will only last a few milliseconds. Instead of dealing with orders as soon as they come in, the platform will wait that long to match buyers and sellers.
Traders and theorists of financial markets usually argue against all trading holidays, whether forced or voluntary, long or tiny. They say liquid financial markets are good for the economy, because ease of selling both encourages savers to buy in the first place and allows them to limit losses. No one should have to wait any longer than absolutely necessary to finish a desired transaction.