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A Day Without Trading

By Alex Planes – Oct 29, 2012 at 2:20AM

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It takes a lot to shut down a stock exchange.

Hurricane Sandy is barreling down on the Big Apple with potentially unprecedented force, and the danger has been deemed grave enough to close all trading on the three major stock exchanges. All three -- owned by NYSE Euronext (NYX.DL), Nasdaq OMX (NDAQ 0.32%), and the privately held BATS Global Markets -- have well-established electronic trading platforms. However, wide-ranging discussions with politicians, regulators, and brokerage firms convinced market operators that it was safer to shut down entirely, avoiding risk to even the small number of technical staff needed to maintain the electronic infrastructure that handles nearly all market transactions.

CME Group (CME -0.65%), which runs the NYMEX commodities exchange as well as the Chicago Mercantile Exchange, will shut down its New York trading floor, but its electronic trading platform will remain open.

A rare occasion
The last time the exchange closed for weather reasons was Sept. 27, 1985, as a precaution against damage from Hurricane Gloria. The threat was enough to close all exchanges nationwide. It wasn't that Gloria was a superstorm that attacked the entire country's financial infrastructure. One critical trade-processing technology company had to shut down its servers because of cooling problems, leaving any open exchanges unable to complete orders. That incident led to changes in the way stock-price information was processed, and modern trading systems are unlikely to suffer similar problems.

Stock exchange closures due to natural disasters or other major calamities have been few and far between. The destruction of the World Trade Center on Sept. 11, 2001, forced the exchanges to close for four days, from the 11th through the 14th. When trading resumed on Sept. 17, the Dow Jones Industrial Average (^DJI 1.20%) dropped by 685 points, the third-largest point decline in its history.

The New York Stock Exchange has only missed five other normal trading days  in its modern history as a result of disasters, including Hurricane Gloria in 1985. Its floor stayed dark on July 14, 1977, after a massive power failure ripped through the city. Exchanges in other cities remained open, and trading in New York resumed the following day without incident. A major snowstorm on Feb. 10, 1969, also kept stockbrokers from the New York Stock Exchange, but other exchanges showed gains on limited trading. The last multiday weather closure was well over a century ago, when a fierce snowstorm shut down the exchange on March 12 and 13 in 1888.

A less-prepared market
Closures for other reasons have had a more lingering impact on the market. In 1968, the stock exchange was closed every Wednesday from the middle of June to the end of the year, to allow brokerage firms to work through a massive snarl of paperwork resulting from swelling trade volume. This series of shutdowns eventually forced the securities industry to modernize, resulting in a financial sector that now relies on computers and provides a far greater level of specialization.

The specter of a world war also forced an extended shutdown of the markets, stretching from July 31 to Nov. 27 in 1914, to prevent a torrent of sales from desperate European stockholders. In those days, adhering to the gold standard would have forced American banks to honor European requests to exchange their proceeds for gold. With no exchanges available for the Europeans to sell through, a vast pool of wealth stayed locked up and inactive for months. Chase National Bank chairman A. Barton Hepburn remarked at the time that "there was no course open to the New York Stock Exchange but to follow suit," as other exchanges around the world had already closed down.

More than 600 members of the New York Stock Exchange greeted the opening bell with a cheer when the trading floor reopened for very limited trading in some bonds that November. Full, unrestricted trading in stocks didn't resume until the following April 1. A year later, the Dow had returned to normal and had even gained 5% from the first day of the closure.

There's virtually no chance of a similarly long stretch of market inactivity today. There are too many participants, too many stocks, and far too many interconnected global trading systems to justify anything on 1914's scale, or even on the scale of 1968. However, extreme weather conditions will always remain a risk to safe and effective trading operations as long as major exchanges locate their operations in low-lying coastal areas, like New York City. The power and history of New York's financial industry make it unlikely that we'll ever see the exchange move to safer climes, but there may come a time in the far future when this sort of relocation planning will be necessary -- not just for the exchanges, but for all of New York City.

For the sake of our friends, colleagues, and readers in the Big Apple, let's hope that day never comes. Stay safe out there today, New Yorkers. And readers, if you'd like to offer your thoughts on the market closure, we invite your comments below.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter, @TMFBiggles, for more news and insights.

The Motley Fool owns shares of CME Group. Motley Fool newsletter services have recommended buying shares of NYSE Euronext. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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