At the Exchange Leaders panel at IDX-V on Tuesday, Walt Lukken (who moderated) and the panelists patted themselves and the industry on the back – but deservedly so – for maintaining liquid, transparent markets while the world burned, so to speak. With a twofold crisis – extremes of volatility and capacity and everyone removed from physical offices because of coronavirus concerns – the industry came through mostly with flying colors.
Massive investments in technology allowed exchanges like Euronext to withstand the unprecedented “stress test” of having 97% of staff at home, according to Euronext CEO Stephane Boujnah. And there was a “flight to robustness” during the crisis in which the market shares of transparent, regulated trading venues increased.
Julie Holzrichter, COO at CME Group, said the planning the exchange had done over many years made the transition more seamless than might have been expected. “What stood out to me is how we all came together to make decisions and implement them. We were able to have people working from home seamlessly with volumes of 57 million at high-volatility times.”
Additionally, she said, the industry’s regulators came through and made adjustments so the exchange could continue to operate.
Despite the high functionality of the industry there were a few issues, including high levels of margin increases during particularly volatile days and settlement issues at the end of the day, particularly dealing with give-ups and trade breaks. There were also some capital problems in the options markets, Lukken said.
Those problems bring the industry an opportunity to look at marketwide circuit breakers, specifically in the overnight hours, Holzrichter said. “The equity industry was generally well coordinated, with the exception of some of the ETFs,” she said. “We need to look at that so we don’t have those extreme moves at the start of the day.”
Trade breaks are indeed a key challenge, said Matt Chamberlain, CEO of the London Metal Exchange. The delivery of metals as physical warrants at the LME was “always an inconvenience but never before seen as a risk. We had to move quickly to dematerialize or at least immobilize those warrants,” he said. “It was a challenge because of legal issues…but it brought people together and proved we were prepared for a crisis as well as for everyday operations.”
Not as much technological change has been made in back end operations as in the front end, Lukken said.
Thomas Book, CEO of Eurex, agreed with Lukken that the industry needs to take a closer look at the back office. “We had our top 10 volume days during this crisis – three times what we see normally. The post trade processing took longer. This highlights the need for renewing legacy technology at some exchanges,” he said.
The panel’s response to a question from Lukken about whether the temporary short selling bans imposed in March in the European equities markets have worked met with a generally negative response.
“It doesn’t make sense to introduce such drastic change in times when you really need to manage risk,” said Holzrichter. “We saw no evidence short selling prolonged market volatility.”
Book echoed that such an intervention from regulators was unnecessary. “Price formation was orderly during those times. We saw a profound change in economic expectations that was mirrored in price development. We don’t see short selling as a main driver of price. To have a marketwide short selling proscription is a major intervention,” he said.
Yet another part of the storm was the negative pricing of oil for the first time ever. The FIA held a webinar about the price drop and 800 people attended – about 75% of whom didn’t understand that commodity prices could go negative. Clearly communication and education is paramount, Holzrichter said. Stuart Williams, president of ICE Futures Europe, emphasized that it was the lack of storage capacity for WTI at the Cushing, Oklahoma, location that played the major role in the price drop. However, the eventual convergence between the oil cash and futures markets was a sign of a market that is working, Lukken said.
The crisis has also presented some opportunities. For Boujnah, the next big wave will be around ESG, in which development has “accelerated massively,” he said. Euronext recently launched a series of products, including the new Euronext ESG 80 index and derivatives, to address that interest. While there is still debate in the U.S. about the importance of such products, ESG, green bonds and sustainable bonds are clearly the route for Europe, Boujnah said.
Many people had expected COVID to slow down innovation but in fact the opposite happened, according to Thomas Book. The wave of digitization has become even bigger, he said.
“There is an unprecedented opportunity in digitization for the B2B workload,” said Chamberlain, including a willingness to engage in industry solutions such as digitizing LME warrants, for example.
The crisis gave the CME Group an opportunity to think about its workplace and how it interacts with clients, Holzrichter said. “Actually, our teams became more productive while working from home. We think the trend will shift a bit more so outreach can be a combination of physical presence and virtual communication across the industry.”
Clearing is also a force, Williams said. “When we came out of the Enron crisis, we saw markets looking more to CCPs. That’s an opportunity for our industry – to deal with complicated counterparty risk.”
The key to “opening up” vs working from home is flexibility, the panel concurred. An audience survey showed many people are eager to return to the office right away, but some never want to come back. Eurex has brought about 40% of its staff back to the office, Book said. The CME is using a phased approach depending on the many regions their markets cover. “We’re not in a huge hurry to get people back in,” Holzrichter said.
Boujnah, however, said that Amsterdam, Paris and Dublin are all coming back to the office in masses, and he expects people to come back now. “Webinars cannot be a substitute for physical interactions,” he said. “A company is all about a human community. If you want to innovate, you need emotional interactions in addition to intellectual interactions. Euronext will not be a cloud company.”