As retail participation surges, WFE urges stock exchanges to remain more vigilant

The World Federation of Exchanges (WFE), the global industry group for exchanges and Central Counterparty (CCP), has issued a guidance note, aimed at policy questions arising from any resurgence of market volatility.

As part of the generally high trading volumes in 2020, in addition to the investment institutions that manage pensions and other savings, there has been a marked increase in retail participation in some countries, in both securities and derivatives, the WFE said, and added: “This has made it especially important to have a fair, transparent price-formation process, which in turn supports investor protection.”

Volatility control mechanisms

The WFE is currently working on a number of other issues related to this year’s market activity, including the role of CCPs in adjusting to changed levels of volatility; the structure of volatility control mechanisms (notably circuit breakers); and the importance of supporting issuers of securities in times of uncertain economic outlook.

In particular, the WFE’s Guidance focuses on how exchanges create fair and orderly markets; and why, when navigating times of economic uncertainty, it is better and safer to maintain continuous visibility of asset prices and risk premia rather than suppressing markets, it added.

Understanding these issues is key to avoiding harmful public policy in relation to all three regulatory imperatives — investor protection, market integrity and systemic risk.

It is well known that markets are an unending, multilateral debate about prospects for companies and countries and about how other market participants will position themselves. This year’s pandemic introduced extraordinary economic uncertainty and, in such circumstances, the strangest outcome would have been for volatility to go down, the statement added. “Even in normal times, the ‘equilibrium price’ is inherently transient and markets would be failing the public if they did not reflect the ever-changing balance of opinion or the arrival of new information,” WFE further said.

Systemic stress

Continuous operation, with some flexibility for pauses when price-moves exceed typical ranges, also has other advantages. It reduces the risk of market prices moving in a sharply discontinuous manner, which could trigger systemic stress. And central markets also provide a safe, reliable channel through which new offerings can come to the market, allowing the economy to continue to evolve while reducing the levels of indebtedness and leverage.

In June 2020, companies raised over $31 billion through IPOs — one of the highest monthly amounts observed in recent years.

Nandini Sukumar, Chief Executive Officer, WFE, said: “The concept of fair & orderly markets goes to the heart of public markets and the willingness to constantly improve them is part of the pledge exchanges make. It goes hand-in-hand with ensuring the integrity of markets. The quickest way to severely damage public confidence in markets is to leave participants uncertain as to when authorities might shut them without warning.”

Similarly, bans on short sales deprive participants of information, making trading less orderly, not more. At a time when the banking channel is facing unusually challenging conditions, such moves would not just be sub-optimal for the economies that the markets serve but would be outright counterproductive, she said, and added: “We are publishing this Guidance Note so that no one need be in any doubt as to the issues at stake.”

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