Under no circumstances should restrictions on trading be invoked because of increased volatility, the WFE says in a guidance note.
The WFE (World Federation of Exchanges) has issued a guidance note on maintaining fair and orderly markets amid concerns of a possible resurgence of market volatility.
“It is better and safer to maintain continuous visibility of asset prices and risk premia rather than suppressing markets,” the WFE said. “Understanding these issues is key to avoiding harmful public policy in relation to all three regulatory imperatives: investor protection, market integrity and systemic risk.”
The guidance note highlights the “successful business continuity plans” executed by market infrastructures – exchanges, central counterparties and central securities depositories. “Market infrastructures have been operating their business robustly as usual, with record volumes of trading.”
It also notes that some jurisdictions put in place certain restrictions on trading as a result of Covid-19 this year. “Under no circumstances should restrictions on trading be invoked because a set of participants is concerned about the movement of asset prices, whatever the direction of that movement,” the WFE says.
In an environment characterised by a “diminished global economic outlook”, uncertainty and a fast-changing policy environment, volatility in prices is to be expected. According to the WFE, this increases rather than reduces the need to keep markets open and transparent.
High volatility or significant price movements do not in themselves mean that exchange markets have become disorderly, as long as the key functions and controls of the secondary market remain operative, it says.
“The quickest way to severely damage public confidence in markets is to leave participants uncertain as to when authorities might shut them without warning,” said WFE chief executive Nandini Sukumar. “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.”
The WFE has long argued that short-selling bans negatively impact market quality. Short-selling bans reduce liquidity, increase price inefficiency, hamper price discovery and have negative spillover effects in other markets, it said in a paper published in April.
The new guidance note is available here.