NYSE’s Closing to ‘Shake Image’ for Exchange, Levitt Says
The New York Stock Exchange’s reputation will suffer because it failed to keep operating during Hurricane Sandy, said Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission.
“People look to the New York Stock Exchange as being the symbol of American capitalism, and to see the exchange go down for two days without an adequate backup plan is very, very unfortunate,” Levitt said in a Bloomberg Radio interview today. “To see the New York Stock Exchange crippled is a body blow that will really shake the image of that institution for a long time to come.”
NYSE Euronext shut markets across every asset class today and yesterday, the first consecutive closures because of weather since 1888, as the storm barreled into New York City. Nasdaq OMX Group Inc. and all other U.S. equity markets also shut down. The exchanges plan to reopen at 9:30 a.m. New York time tomorrow. NYSE headquarters are running on backup power and will keep using it if necessary all week, Larry Leibowitz, the chief operating officer, said in a phone interview.
“Arthur has been involved in the industry for a long time but is maybe a little out of date with the facts,” Duncan Niederauer, chief executive officer of NYSE Euronext, said today in an interview on Bloomberg Television with Matt Miller. Members of the securities industry told the exchange that opening during the storm “was going to require them to put a lot of people in harm’s way,” he said.
“So upon further review, we decided it was better judgment not to do that,” Niederauer said. “I thought that was pretty clear to everybody. Maybe it wasn’t clear to Arthur.”
Exchanges had planned as recently as Oct. 26 to open for normal business this week before forecasts for the storm got worse. At about 4 p.m. on Oct. 28, the NYSE announced it would shut its trading floor at the stock exchange’s headquarters in lower Manhattan and use its NYSE Arca exchange, a fully electronic platform, for all transactions. After a series of discussions between exchange officials, market makers, the SEC and other participants, the industry said at about 11 p.m. that night that all markets would be shut on Oct. 29.
The NYSE’s plan to switch floor trading to Arca spurred investor concern about potential malfunctions in a market still shaken by recent trading mishaps, including a software error at Knight Capital Group Inc. (KCG) that almost sent the Jersey City-based market maker into bankruptcy in August.
“Our backup plan to trade on a fully electronic basis was ready to be implemented,” Robert Rendine, a spokesman for NYSE Euronext (NYX), said in an e-mailed statement today. “However, given the impending storm, it was increasingly clear that it would be extremely difficult to ensure the safety of our respective employees, and the entire industry decided it was best to close the markets.”
Levitt said that the NYSE should have moved operations to a location “far away” from New York during the storm.
“If you’re going to have a stock exchange, it should have a backup facility of some sort so that regional events don’t cause its closure,” said Levitt, who is a Bloomberg LP board member and an adviser to Goldman Sachs Group Inc. “This should not happen to the world’s most prominent exchange.”
U.S. exchanges are required to have backup plans to operate away from their main data centers in the event of a catastrophe. The primary facility for Bats Global Markets Inc., for instance, is in Weehawken, New Jersey, while its backup is in Chicago. Nasdaq Stock Market and other exchanges also have backup data centers. NYSE’s contingency plan is to use the electronic NYSE Arca platform.
The SEC approved that plan in 2009, according to Niederauer.
TMX Group Ltd., which runs the Toronto Stock Exchange, maintains two equity trading data centers in different parts of Toronto, Carolyn Quick, a spokeswoman, wrote in an e-mail today. Each center is in a secure building with an independent power source, she said.
“All of TMX Group’s exchanges have highly-detailed disaster and business continuity plans that would be activated in situations of this nature,” Quick said. “These plans are regularly tested to ensure that we are in a constant state of readiness.”
Deutsche Boerse AG (DB1), the Frankfurt-based exchange company, also has backup locations, though the managing board and the State of Hesse have the ability to shut down trading if access isn’t equal for all participants in the event of a disaster, spokesman Frank Herkenhoff said by phone.
“It’s a question of dimension,” Herkenhoff said. “If there’s a local problem, then you can switch to your mirror location, but if the whole of Germany or Europe is haunted by thunderstorm or earthquakes, then you probably want to and need to close down all operations.”
Exchanges are planning to reopen Oct. 31, weather permitting, according to statements from NYSE Euronext and Nasdaq OMX. The last comparable closure of the New York Stock Exchange was on March 12 and 13, 1888, when a blizzard dumped 21 inches of snow on New York, according to the company’s website. The exchange was closed for about 1 1/2 days after a snowstorm in February 1978.
The storm came ashore at about 8 p.m. yesterday in southern New Jersey and drove floodwaters to life-threatening levels in regions with 60 million residents. Power was lost in Manhattan “river to river,” south of 35th Street, though some of the blackout was deliberate, as Consolidated Edison Co. shut off electricity to protect its underground equipment from potential damage. NYSE’s building is located at 11 Wall Street in lower Manhattan.
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