Marketplace

Shut down the stock market?

Question: Dear Marketplace, I have been thinking about this for some time, but could never find an answer on my own, so I am hoping you can help me out. Every weekend and on several holidays, the US Stock Market (and every stock market it seems) closes. During that time, the market doesn't go up or down, and thus while people are not making money they are also not losing money.

I remember a few months ago that one of the world's stock exchanges was closed, and looking at the history from the NYSE website, it has closed or had part-days hundreds of times in the past for various reasons.

Can the government force the closure of the stock exchange if the stock prices fell too low or too quickly? Is it economically viable, or wise, to keep the exchange closed for more than a day in order to stop the decrease in values of people's mutual funds, stocks, IRA's etc? Would such a period cause stock brokers to want to sell more and faster when the exchange would be re-opened, or would such a closing allow people to "cool down"? (Though the last question is more of a social/psychological question) Thank you for your time. Douglas, New York, NY

Answer: I recently pulled a wonderful book of financial history off my book shelf at work. It's "When Washington Shut Down Wall Street," by William Silber. He's a finance economist at New York University's Stern School of Business. I've only just started it but it's a tale of U.S. Treasury Secretary William Gibbs McAdoo taking dramatic action in the summer of 1914--before the Federal Reserve opened for business. The outbreak of World War I threatened the U. S. with financial disaster. The dollar was falling, and investors feared that the U.S. would go off the gold standard. Gold was flowing out of the country. McAdoo closed the New York Stock Exchange for more than four months "to prevent Europeans from selling their American securities and demanding gold in return. He smothered the country with emergency currency to prevent a replay of the bank runs that swept America in 1907. And he launched the United States as a world monetary power by honoring America's commitment to the gold standard," according to the book's blurb.

The New York Stock Exchange has been periodically shut down, the last time following the tragedy of 9/11. Another notable moment was during the Bank Holiday of 1933. Today, there are also procedures in place to stop trading if the market plunges too far too fast. (See my earlier post on the daily trading downward limits, "Where are the stock market "circuit breakers"?")

Indeed, New York University economist Nouriel Roubini on October 23rd predicted that policy makers might be forced to close financial markets as the panic selling accelerated. They didn't, but the next day the U.S. stock futures market stopped trading. Declines of more than 6% tripped the circuit breakers at the opening. Still, the stock markets circuit breakers are only designed to stem a panic, and at most are imposed for a day.

The President can close the stock markets. Nevertheless, while most economists recognize that stock markets can or should be closed at extraordinary moments, most would argue for keeping the practice a rarity rather than an acceptable tactic. The reason is that it's almost always far better to let buyers and sellers try and figure out where the market is going, and then let the traditional evening close stop trading. (Of course, in a high-tech global capital market the reality is that trading continues in other markets and in different time zones.) The real risk is that a government-mandated shut down for any period of time can make the panic worse. About a decade ago, the late Nobel Laureate Merton Miller told Business Week that ``You want the price to fall, because that will bring buyers out of the woodwork.''

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