* Trade could be volatile after two days of closure
* Fiscal year-end for some funds could add to volatility
* NYSE, Nasdaq OMX testing trading systems on Tuesday
* NYSE could switch to electronic trading if necessary
* Sandy delays dozens of U.S. earnings season reports
By John McCrank and Sakthi Prasad
Oct 30 Major U.S. stock exchanges expect to
reopen on Wednesday after Sandy, the worst storm to hit New York
in nearly 75 years, closed trading for two days.
NYSE Euronext said the New York Stock Exchange would
open as usual, although it was prepared to switch to fully
electronic trading if necessary. Nasdaq OMX's Nasdaq Stock
Market was also to be operating on Wednesday, as were BATS and
Direct Edge Exchanges.
"We have a green light," the chief operating officer of NYSE
Euronext, Larry Leibowitz, said in an interview.
All of the U.S. stock market operators took part in
coordinated testing on Tuesday for trading on NYSE's backup
system, should it need to be used. The exercise was also aimed
at allowing member trading firms, many of which are operating on
backup systems themselves due to complications from the storm,
an opportunity to make sure they are ready for Wednesday.
At least 30 people were killed and millions have been left
without power after Sandy slammed into the East Coast on Monday.
The storm shut down most businesses in Manhattan and caused a
rare flooding of the subway tunnels, which is expected to keep
the system closed for several days.
U.S. exchanges originally had planned to open markets on
Monday, but they eventually responded to pressure from firms
worried about employee safety, as well as the inability to see
markets function effectively at light staffing. It was the first
time in 27 years that exchanges closed because of bad weather.
Banks, brokers and others conferred for hours on Tuesday
about the feasibility of resuming trade. The storm was expected
to result in tens of millions of dollars a day in lost revenue
for exchanges and banks, analysts said.
After two days of closure that occurred during the busy
corporate earnings season and at the end of the fiscal year for
certain funds, trading is likely to be volatile.
"At least in the early trade I expect an overreaction
regardless of the direction. I expect to see a lot of volume at
least in the first hour," said Art Hogan, managing director of
Lazard Capital Markets in New York.
The NYSE, which accounts for about a quarter of U.S. stock
market trading volume, tested the possibility of routing trades
through its electronic platform, Leibowitz said. Under normal
conditions it handles about half its volume through its trading
floor at 11 Wall Street, where traders and specialists buy and
sell stocks in person.
Many of NYSE's member trading firms including the top 25,
which make up more than 90 percent of volume on the exchange,
took part in the tests, Leibowitz said.
"Tomorrow will not be without hiccups, but will be good
enough that the market will be fine," he said.
The NYSE had said on Sunday afternoon it planned to close
its trading floor and to move all trading to its electronic
market. It backtracked on that idea after traders and regulators
expressed concern - given the difficulties and low staffing
levels due to the storm - about moving everything to the
all-electronic venue, a plan tested on March 31 but never used
An industrywide testing session was held in the morning.
Rival exchange Nasdaq also conducted its own tests, as did BATS,
the No. 3 U.S. equities exchange.
There were some issues at the beginning of the BATS tests,
mostly related to members having trouble getting into Manhattan
due to flooding and transportation problems, but those issues
were resolved by midday, said Chris Isaacson, BATS' COO.
"The majority of our members connected today," he said.
The industry also tested things like volatility trading
pauses to handle any abnormal volatility in securities,
including NYSE-listed securities, he said.
"I expect normal trading tomorrow," said Isaacson.
Bond markets were also closed on Tuesday. Financial industry
trade group SIFMA said it is recommending the market reopen on
September 2001 was the last extended period of time that
exchanges closed. The New York Stock Exchange and the Nasdaq
closed on Sept. 11, a Tuesday, after the World Trade Center
attacks and did not reopen until six days later, on Sept. 17,
the following Monday.
"It would be unprecedented to have three days of closure
from a weather-related emergency, and the greater point is that
American markets do not want to be perceived as anything other
than reliable," said Mike Shea, managing partner and trader at
Direct Access Partners LLC in New York.
"That's really the issue. An emergency like Sept. 11 was
Kenneth Polcari, long-time floor trader at the NYSE, said he
was still waiting to hear how the exchange would get the direct
market-makers - the specialists who facilitate buy and sell
orders - to the floor.
"If they aren't there and they still trade, then there is no
reason for them to have those guys at all," he said.
Leibowitz said there was no plan to end floor trading at
NYSE. "We think there is a role for people and judgment and
responsibility. Just because you can run with technology alone
doesn't mean it's the best way to run."
Recent high-profile technical snafus like the glitch that
prevented BATS' market debut on its own exchange, Facebook's
botched IPO on Nasdaq, and Knight Capital Group's near-fatal
trading glitch have increased scrutiny of electronic trading.
Nasdaq, BATS and Direct Edge are fully electronic.
MANY BANKS OPENING, SLOWLY
Plans to resume trading will be complicated by the lingering
effect of the storm on New York. Sandy brought a record storm
surge that flooded subway tunnels, and subway service is not
likely to resume for four to five days, Mayor Michael Bloomberg
said on Tuesday.
JPMorgan Chase & Co, the largest U.S. bank, expects
many employees will be able to return to buildings starting on
Wednesday, according to an internal memo obtained by Reuters.
One of Citigroup's main investment banking buildings,
at 388 Greenwich Street in Manhattan near the Hudson River, had
minor flooding, and was without power, an internal memo said. A
smaller Citigroup building also by the Hudson River was running
on a generator. The bank expects both to be accessible within
Goldman Sachs Group Inc's offices in Lower Manhattan
and Jersey City, New Jersey, on opposite sides of the Hudson
River, were not open on Tuesday, and by early afternoon the bank
was still not sure whether they would open on Wednesday, after
sustaining minor amounts of flooding.
Morgan Stanley, whose headquarters is in the
less-affected Times Square area, said it expects to be open for
business and functioning when U.S. markets open.
Both banks had other offices open for employees to work from
outside New York City through the hurricane, as well as remote
access for many of their staff.
POTENTIAL FOR VOLATILITY
When markets do open Wednesday, it could come with a burst
of volatility after a two-day shutdown in the middle of earnings
season and just days before the Nov. 6 U.S. presidential
election. Undoubtedly, some investors will try to game out what
sectors and stocks will be helped or hindered by the storm, but
the broader economic effect should be limited.
"You have earnings, a heavy economic data calendar, the
election cycle, it's a catalyst-rich market sitting idle for a
few days and there could be an unusual reaction. We have to get
through the first hour and see where the chips fall after that,"
said Hogan at Lazard Capital.
Some companies, including Pfizer Inc, the largest
U.S. drug maker, delayed the release of results until the storm
passed, but others released theirs on schedule.
Tim Ralph, a money manager at Biltmore Capital in Princeton,
New Jersey, said utilities and casino companies will take
financial hits from the storm, noting in particular the level of
overtime that the utilities will be paying out as they deal with
downed lines and power outages.
He expects shares of Verizon, Comcast and
Consolidated Edison to fall sharply once trading resumes.
Brian Gendreau, market strategist with Cetera Financial
Group, said markets tend to rebound to their previous levels
within five days after natural disasters.
"The U.S. is a very big economy, and while the magnitude of
this storm could be in the billions it's actually very small in
relation to GDP," he said.
Because Wednesday is also the end of the fiscal year for
some mutual funds, there could be some volatility in markets as
mutual funds sell underperformers by the end of trading on that
day in order to avoid taxes on some of their portfolio gains.
Eric Marshall, who co-manages five mutual funds at Hodges
Capital in Dallas, said his firm is moving all of the selling it
had planned to do Monday and Tuesday to Wednesday.
"This is going to drive volatility on top of what we're
already expecting from the aftermath of the storm," he said.