What would be the effect of closing stock market trading for two months to Coronavirus?

Question

We all hear about the massive fluctuations of the stock market due to fears and responses to the coronavirus pandemic. The market also has also triggered "circuit breakers" that temporarily halt trading to prevent massive swings.

What could potentially happen if they just halted all trading for the next two months as a medium-term circuit breaker? Assume they did it at night without warning so that people couldn't get trades in before the closure. Would the rest of the economy continue to function otherwise (other coronavirus effects not withstanding)? During the closure, I would imagine that stock prices would just stay the same and then companies would adapt to their changing supply and demand situation as needed, right?

Once it opened again there might be a swing once we know which companies have survived the pandemic and which won't but that speculation is happening on a daily basis now, why not just close it to prevent chaos and allow companies to think longer term without worrying about momentary market valuation?

Answer 1

This idea of an extended "market holiday" is a completely normal idea. A lot of people have had this idea, especially today, and I'll tell you below why it's terrible. Just flat-out bad. I once had this idea during the GFC when I was also new-ish to the market, so don't feel bad.

I believe one of the CNBC hosts was touting this idea this morning. A simple way to refute one of the underlying notions here is thus: If you don't like what you see then just go ahead and close your eyes, and the bad thing will go away right? Of course not.

You might say "Maybe the market just doesn't know what stocks are worth right now and that's why the market is down." I'd answer that no one ever really knows exactly what a business/stock is worth (some exceptions aside). Generally, people who sell think it's worth less than the price and people who buy think it's worth more, so why do we need to shut the market?

You might say "Maybe not everyone feels comfortable trading or feels like they know what this specific business/stock is worth right now so that's why we should halt trading." I'd answer with why can't the people that do want to trade continue trading and if you don't know/ just aren't "comfortable" then step aside, no one is forced to trade (unless maybe they used leverage/need the money).

The punchline on extended market holidays, reiterated: Except in cases of traders or technology used to trade actually being unavailable/overtaxed for some reason, it's something we should avoid at all costs. There are lots of negatives, and I'm not aware of any positives outside of the corner cases mentioned above.

A surprise trading halt as you mentioned of an extended variety is one of the worst things that can be done to a market. Imagine...

• Surprise! That thing you owned that you thought was liquid and you could buy or sell on most days Monday-Friday, excepting holidays, actually isn't! And if you need to raise money between now and the market re-opening, tough!

• When the market does re-open, going forward, everything in that market should be priced more cheaply in one respect, and that is to account for a new illiquidity premium that has been introduced to the market. All else equal, if you could own the same stock on two exchanges and one had random extended trading halts while the other didn't, there should be a disparity in the pricing, albeit not massive, between the two. I'd rather own the one that trades more frequently. Illiquidity in an asset is not a good thing.

• Just because something isn't trading and its price stays the same doesn't mean its value is not changing, it just means that it's harder to estimate(no one can truly see it) that true value. It's quite possible that when the market reopened some of the companies would be worthless. See the bullet two down on the economy for more info here.

• It's harder for everyone to deal in securities that have random extended halts because of those halts, which hurts liquidity even further going forward. Less liquidity is bad.

• The rest of the economy would continue to function, but not as well as it would with the market open. So many transactions happen in the market on a daily basis and while some of these are retail or professional investors trading in the market, many of these trades are transactions where one company is hedging their exposure to another company. Or, just using the market to see a gauge of the health of their counterparty to determine if they're going to engage in a business transaction and if so at what level with what other terms. Imagine one company is buying components from another. Each will look at the markets to judge the health of the other in their negotiations. Without functioning markets, that process gets more difficult and it is exponentially more difficult at times of stress when companies are worried about the health of other companies. That is when it is most important for markets to be open. If markets are not, distrust reigns and activity/deals between companies grind to a halt. That harms the economy.

• Closing the market doesn't allow companies to think longer term. Closing the market causes everyone to speculate which companies are in credit trouble and won't be around. Others seek to limit or avoid exposure to the firms that might be failing by cancelling orders and halting shipments. Just the rumor that someone is in trouble will cause others to stop dealing with that firm and then it really is over for the company in question. If the market was open that didn't have to happen.

• The "chaos" you describe is simply the process of price discovery in times of uncertain economic outlook. The market is volatile, it is what it is. Instead of wondering what companies are likely worth for the next two months we can let them trade and have a best estimate. That's what the market is, an estimating machine for the value of businesses. Those values are very important to businesses as they do business with each other. The stock market is not some pure speculation machine/ random number generator that pushes values around willy-nilly.

• Think of it this way: Maybe I don't like when prices change so we should just have stocks trade once a year, then everyone can really "plan long term?" That sounds ludicrous right? It's the same idea.

• The world is a scarier place, companies are making less, businesses are hurting, people are dying and stocks are worth less as a result. Closing our eyes won't make the situation any better. Restricting trade by closing the market would hurt the underlying economy. Trade is generally a pretty good thing.

Answer 2

RWP's answer outlined what would theoretically happen when the stock market suspended. Here I give an actual example of what actually happened when a stock market was suspended for a few days.

On 1987's Black Monday, Hang Seng Index dropped by 11% (3,783.2 to 3,362.4). Afterwards, New York's stock market continued to plunges for 22% during their daytime (Hong Kong time midnight on Tuesday 20th). Before SEHK started trading in the morning of 20th, it announced that trading would be suspended for 4 days, from Tuesday 20th to Friday 23rd, to "clear the backlog of trades to be settled". When trading resumed on Monday 26th, it crashed, from 3,362.4 to 2,241.7 (-33%). This marks the largest percentage drop in HSI to date, and one of the most largest drop by index value.

In contrast, the drop for DJI was more mild in comparison. In fact, if we compare the change from 19th to 26th, DJI actually gained back a little (1738.74 to 1793.93).

If we take a longer timeframe and look for the time needed to regain the loss, say to go back to the index value on 1st October 1987, DJI just took less than 2 years (in July 1989), where HSI took 2 more years (in July 1991).

Going back to the 2-month period before and after Black Monday, combining both graphs and normalizing by 1st October index value shows how significant the difference is between HSI (which has a 4-day suspension during the crash), and DJI (which has no suspension). To reduce the effect of geographical/political issues, I also added Nikkei and KOSPI to the graph.

So here, I showed that suspending trading on a regional exchange for just a few days have a significant negative effect on both short and long terms, compared to those markets which stays open. Now imagine the effect of closing an exchange thousand times larger and for multiple times longer. This is an artificial financial risk that few people dare introduce to the already tumbled market.

(Data source: Yahoo Finance and investing.com)