NYSE Euronext Weighed Arca Contingency Plan as Irene Headed for Northeast
As market officials told the public last week they planned to open after Hurricane Irene, the New York Stock Exchange worked on contingency plans that would have moved its trading to an electronic venue.
NYSE Euronext prepared to invoke emergency authority it got in 2009 to declare its electronic exchange, NYSE Arca, the stand-in for the New York Stock Exchange, Richard Adamonis, a spokesman, said in a phone interview. The NYSE market would have remained open with trades processed through the Arca platform, which would have been designated the official NYSE exchange.
“NYSE would remain open with the contingency in place,” Adamonis said. “Effectively, Arca becomes NYSE and it operates under Arca rules.”
No such action was necessary. U.S. stock markets and the Securities and Exchange Commission decided yesterday to open after Irene, once a Category 3 hurricane, was downgraded to a tropical storm that produced less damage and flooding in Manhattan than anticipated. Should markets have closed, it would have been the first shutdown due to weather since 1985.
NYSE received powers in December 2009 allowing it to let Arca operate on its behalf “in the event that an emergency condition prevents the NYSE from operating normally,” according to the rule, which the SEC approved. NYSE’s Rule 49, which has never been invoked, says the declaration must be necessary for the securities markets to continue to operate.
“If we can open here but none of our customers can get to their desks, it really doesn’t make a lot of sense to open the exchange,” Louis Pastina, senior vice president for NYSE Euronext (NYX), said in a Bloomberg Television interview on Aug. 26.
Should the NYSE trading floor be closed, Arca would handle transactions in listed NYSE shares and run the opening and closing auction process used to set the equity prices at the start and end of the day, Pastina said in an Aug. 26 phone interview. Arca, which doesn’t rely on human traders, matches orders in all U.S. equities. NYSE handles buy and sell requests only in companies it lists.
NYSE Euronext, Nasdaq OMX Group Inc. (NDAQ), Bats Global Markets and Direct Edge Holdings LLC opened for business today, a day after Irene passed through New York.
The decision to declare Arca the primary market in NYSE’s stead would have been made by NYSE Euronext Chief Executive Officer Duncan Niederauer, the CEO of NYSE Regulation or one of their designees, according to a NYSE Regulation information memo from March 2010.
The owner of the Dow Jones Industrial Average was ready if NYSE declared Arca would match orders on its behalf, John Prestbo, executive director of Dow Jones Indexes, said in a phone interview on Aug. 26. The index provider planned to compute the level of the benchmark gauge for the 27 stocks listed on NYSE using prices supplied by Arca, he said.
All except three constituents of the Dow including Armonk, New York-based International Business Machines Corp. and Johnson & Johnson in New Brunswick, New Jersey, list their shares on NYSE, with that exchange’s prices used through the decades to tally the DJIA level, Prestbo said. Dow Jones Indexes is 90 percent owned by CME Group Inc. (CME), which trades equity index futures on its Chicago Mercantile Exchange.
“Our systems are flexible enough that we could take other incoming prices,” Prestbo said. “If there’s trading in the Dow stocks going on, the Dow would be calculated. If NYSE declares a designated substitute, that would make it the primary market.”
NYSE traded 23.5 percent of total U.S. volume in companies listed on its market last month, while Arca’s portion of those stocks was 10.4 percent and Nasdaq Stock Market’s was 14.2 percent, data compiled by Barclays Plc showed. About 55 percent of U.S. shares traded are in New York Stock Exchange companies. Nasdaq, NYSE Amex and NYSE Arca also list shares.
NYSE’s contingency plan designating Arca as operating on its behalf “would have presented unique challenges, but people were ready to execute” on the plan, Chris Isaacson, chief operating officer at rival Bats Global Markets, based in Lenexa, Kansas, said in a phone interview yesterday.
“Bids and offers entered pursuant to NYSE Rule 49 would be deemed to be bids and offers of the NYSE,” the exchange said in the SEC filing. Transactions in NYSE companies on the Arca exchange would also be considered New York Stock Exchange trades, it said. They would get the traditional “N” tags used for shares that change hands on NYSE. Arca trades are identified by the letter “P.”
While Arca would function on behalf of the parent company’s more-famous exchange, its rules and policies would hold sway. NYSE’s designated market makers would lose their current status and operate under Arca’s rules, according to the NYSE filing. NYSE and Arca employ different ways of prioritizing and matching buy and sell orders.
Eric Noll, executive vice president for transaction services at New York-based Nasdaq OMX, said in a phone interview on Aug. 27 that the exchanges expected to act in concert in deciding whether markets would open.
After the terrorist attacks that destroyed the World Trade Center on Sept. 11, 2001, the exchanges “spent a great deal of time getting ready and building emergency disaster recovery-type functionality” aimed at allowing markets to remain open, Noll said. “The markets are international. Being able to be open and functioning is important.”
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