Volatility in markets natural: WFE

World Federation of Exchanges (WFE), the global industry association for exchanges and clearing houses, has issued guidance on fair and orderly markets at a time when global markets are witnessing a high degree of volatility due to the pandemic impact.

“There has been a marked increase in retail participation in some countries, in both securities and derivatives. This has made it especially important to have a fair, transparent price-formation process,” the WFE said.

“This year diminished has seen a global economic outlook due to Covid-19, along with a series of actions by authorities that are unprecedented in modern times: restrictions on commerce and movement alongside trillions of dollars of fiscal and monetary stimulus. In such an environment,characterised by profound uncertainty and a fast-changing policy environment, volatility in the prices of financial assets is to be expected,” the federation said.

A well-functioning exchange is one that facilitates continuous trading in securities and derivatives, and which provides for the transfer of risk and maximises the incorporation of new information in the value of financial instruments, WFE said.

The purpose of these markets remains to serve the real economy– to raise capital for businesses, to facilitate the investment of savings, and to transfer risk to the parties willing and able to bear it.

Market infrastructures – exchanges, central counterparties and central securities depositories– are amongst the critical elements of the financial system which must in principle remain open. For this reason, they have welldeveloped business continuity plans, which were executed.

As in past crises, any extraordinary closure has been as strictly limited as possible. After the 9/11 attacks in 2001, for example, the New York Stock Exchange was closed for six days, as IT infrastructure connecting into the market that had been damaged was repaired.

“Under their successful business continuity plans (including remote working), market infrastructures have been operating their business robustly as usual, with record volumes of trading. In a small number of jurisdictions, the government or regulator did put in place certain restrictions on trading as a result of Covid-19, for reasons of social distancing,” WFE said.

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 said.

“Falling (or, rapidly rising and falling) asset prices do not imply a lack of integrity in the market on which those assets are traded,” it said.