EPISODE 166

The Decision to Temporarily Close the New York Stock Exchange Trading Floor

57 minutes · March 20, 2020

In our 1st ever remote podcast, NYSE Group COO Michael Blaugrund Skyped in from his secure remote location to break down the decision to temporarily close the Trading Floor & the impact that COVID-19 will have on the markets & trading. Michael explains that, long before social distancing, the Exchange has been preparing for this sort of emergency contingency, starting with the 1st electronic trading systems that were deployed at the NYSE in the 1950s to bringing the NYSE Pillar platform online in 2019.

Speaker 1:

From the Library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, your Inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership, and vision and global business. The dream drivers that have made the NYSE an indispensable institution of global growth for 225 years. Each week, we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism. Right here, right now at the NYSE and at ICE's exchanges and clearing houses around the world. And now welcome, Inside the ICE House. Here's your host, Josh King of Intercontinental Exchange.

Josh King:

Well, it's been quite a week. Everyone adapting to a new way of life. For how long, who knows? A new way of life for this podcast, too. And for how long, who knows? Those of you who listen to us regularly have become used to excellent sound quality of two people talking in an acoustically pristine room, the Library of the New York Stock Exchange, and having those recordings released usually on Mondays as the work week begins.

Josh King:

Well, when the next work week begins, we won't be here. Working remotely like the rest of the world. On March 23rd, 2020, the world's capital markets will open trading for the first time, since May 16th, 1792, without a group of traders physically gathering in one location to ensure smooth and orderly trading of securities. Some perspective on that. So only one company listed on the New York Stock Exchange today, BNY Mellon, had shares trading anywhere the last time the market's traded without the trading floor as its anchor. During the last 228 years, if the markets were open, so was the trading floor, through times of peace and war, good times and recessions, and a pandemic or two.

Josh King:

Technology has certainly evolved trading, but the important role of the floor has kept pace. It is, needless to say, the decision made by the New York Stock Exchange and Intercontinental Exchange management teams to temporarily close the floor to aid the slowing of the spread of COVID-19, not one that was made lightly or without years of preparation.

Josh King:

Our guest today calling in from a remote location is NYSE Group Chief Operating Officer, Michael Blaugrund. He joins us to explain why the floor is closing and how the exchange has been preparing for this sort of emergency contingency since the first electronic trading systems were deployed on the NYSE in the 1950s, two now, bringing the NYSE Pillar platform online in 2019.

Josh King:

Our conversation with Michael on what will happen Monday morning when the bell rings above an empty floor, and how the unfolding COVID-19 pandemic will continue to impact the markets and trading. That's right after this.

Speaker 3:

And now a word from John Berger, President and CEO of Sunnova, NYSE ticker, NOVA.

John Berger:

We're a solar company. We're out there to bring solar to every home in the country. We have such a vast market that remains untapped. I think it's less than 3% of the market of homes in the United States. And so there's just so much potential.

John Berger:

New York Stock Exchange is the home of capitalism. It's just where the action happens. No matter where you are in the world, all eyes are on the New York Stock Exchange. Sunnova now listed on the New York Stock Exchange.

Josh King:

Our guest today, Michael Blaugrund, is the Chief Operating Officer for the New York Stock Exchange Group. He's responsible for the New York Stock Exchanges equity and options trading businesses, including the NYSE, the NYSE American, NYSE Arca, and New York Stock Exchange National Exchanges. So additionally, he oversees the New York Stock Exchange FINRA Trade Reporting Facility and New York Stock Exchange bonds fixed income exchange.

Josh King:

Previously, my friend Michael was the Director of Business Development at Tower Research Capital, and he also led US Equity Product Strategy at NASDAQ. Welcome Inside the ICE House for our first remote podcast, Michael.

Michael Blaugrund:

Thanks for having me. I've always dreamed of being on your podcast, Josh. But I thought we'd be in the luxurious New York Stock Exchange Library, maybe with some sort of fine liquor or something else appropriate versus Skype.

Josh King:

Well, we are on Skype, so we can do it remotely anyway, because we are socially distancing probably by about 50 miles. We're recording this over Skype as the New York Stock Exchange is adjusting. So it will likely be this new normal, at least for a bit.

Josh King:

How's the adjustment going for you? I'm looking at you now over Skype. And like so many other things, I'm seeing all these sort of living rooms and studies that anchor people and other people who are working remotely live in. So I go from seeing trophy walls behind people to just sort of a nicely painted wall like yours, but you've been sequestered like that for a while.

Michael Blaugrund:

Yeah. This room will be my daughter's once she gets out of the crib. Right now she's actually in a crib in our closet. But once she's old enough to kind of sleep through the night on her own, this will be her room. So right now, for better or worse, we've not yet painted the walls pink or done anything else that makes it too distracting for work.

Josh King:

I mean the COO of the New York Stock Exchange, you and I have been on a lot of calls and issues over the last week. Well, I've been here. You've been part of the other team that's ready to come in if this team ... something were to happen to this team or to flip over. I mean, how has it been to see the work of the Exchange happen basically through your computer screen?

Michael Blaugrund:

It's been both impressive and extraordinarily frustrating. The team went from being sort of shoulder-to-shoulder, to distributed very quickly. And I would say from a productivity perspective, from a communication perspective, it's been fairly seamless and it's been really remarkable the way that we've been able to pivot. But, to be in market conditions that are this extraordinary and dealing with strategic questions that are this significant and have to do it from a distance is maddening.

Michael Blaugrund:

And yesterday, when we made the extraordinary decision to have to temporarily close the trading floors, everything in my being wanted to be on the floor to explain what was going on to the men and women who work down there. And it was impossible.

Michael Blaugrund:

So on the one hand, it's been encouraging and kind of inspiring to see that community in the face of personal danger in some respect commute through New York City to come to the Exchange. And the Exchange itself is well cleaned and sanitized and has medical personnel providing screening. That building is probably the safest building in America, if not the safest building in the world. But you've got to get on the path train, or you've got to get on the subway.

Michael Blaugrund:

And that group could tap out and decide that they aren't interested. But instead, they were asking us to keep the floor open for as long as possible, to keep business as normal as possible. And it's a patriotic group. It's a group that believes in service, both to their customers and to the public. And it's inspirational. And I wish I were there.

Josh King:

And when you are there, any of us when we're on the floor can look up at any of the tickers or the big board and see not only how the Dow Jones industrials are doing, but the various different segments of the industrials and different markets are doing. You could basically look every angle up into the ceiling and get a sense of how the global economy is functioning at any particular moment. And with you and your daughter's future bedroom, it's more difficult to do that.

Josh King:

And as I mentioned in the introduction, we're going to focus on this unprecedented closing of the stock exchange floor. But before we launch into that, let's talk about the market in general, because from what you used to just see, by looking up to the floor, you can probably see on various websites and the TV shows that you have on mute while you're doing all your work there, but the COVID-19 pandemic and the shutting of most economic activities across the world, how has it played out across the markets as you've been able to see them over the last week, two weeks really?

Michael Blaugrund:

With a couple of notable exceptions for retail trading platforms, the thing that I think is most remarkable, at least from my particular vantage point is that the market infrastructure, which has been built for active trading but never tested under the type of strain we see now, has been extraordinarily resilient. Whether it's exchanges or broker dealers or investment managers, the entire industry has been able to withstand really just sort of in some cases orders of magnitude increases in terms of the load that those systems have to bear. And the people who are supporting those systems simultaneously are having to protect their families and move into sort of uncomfortable or kind of unusual working environments.

Michael Blaugrund:

So from a pure market operations perspective, it's really been a success story. And as we move into the all-electronic configuration on Monday, that success story will continue. But it takes a tremendous amount of preparation, planning, and coordination across the industry for that to be the case.

Michael Blaugrund:

I follow along just like you, as we see stock prices falling and we hear about credit markets starting to be less liquid, and we hear about policy decisions being made by governments across the country, excuse me, across the world, to try to respond to some of those concerns. Some of them seem very thoughtful. Some of them seem very reactionary.

Michael Blaugrund:

And so, beyond the market operational elements, I think the United States has taken a very appropriate and stabilizing perspective of ensuring that people know the rules of the game are going to continue to remain the same. And even if a well-intentioned change is made, there's a good understanding between the players in the United States that those well-intended changes could have unintended consequences that could be very damaging.

Michael Blaugrund:

So I think it's been very encouraging that throughout this period markets have operated well, and policy makers have been a stabilizing force trying to dispel rumors about potential market closures or shorten trading days or short sale bands or other kind of extraordinary activities, which when we see red prices on the screen, other voices will ask for dramatic action. But I think certainly the New York Stock Exchange, Intercontinental Exchange and in our conversations with federal and state authorities there seems to be real consensus and a sense of unison in which everyone wants to remain calm and ensure that things operate as people expect.

Josh King:

So they're operating as people expect, Michael, but sometimes things are happening this week and last week that really have not happened going back to the mid-90s. The volatility tripped the market wide circuit breaker four times since March 9th. As a refresher, this trading device was conceived coming out of the market crash of 1987. I was with Stacy Cunningham, the President of the NYSE earlier. She was looking at a essay that she was just sent by former Treasury Secretary, Nicholas Brady, who served as Treasury Secretary during the Reagan Administration. And it was so profound. She read it to me. And I have it here.

Josh King:

It says, "Circuit breakers make sense, but closing markets abruptly and with little warning is a bad idea and can cause real panic. If markets are shut, investors and traders are locked into positions and can't liquidate. They can just get more worried and more frightened. Back on October 19th, 1987, exiting after a speech at 1:00 PM, SEC Chairman David Rooter was asked if he discussed closing the NYSE with President Reagan. He said, 'Although he hadn't talked to the president, anything is possible.' In the next 45 minutes, markets plunged even more dramatically than they already had."

Josh King:

So we've seen them a couple times after they opened, these four circuit breakers, and then one midday. What were your thoughts as you watched them unfold and how they performed?

Michael Blaugrund:

Like you said, the market wide circuit breaker regime that we operate today had never been invoked. It was sort of modernized in the wake of the 2010 flash crash. And for the past decade, it's never, ever needed to be invoked. And in the past eight trading sessions, it happened four times. So these are really extraordinary-

Josh King:

How do they work-

Michael Blaugrund:

... circumstances. So the market wide circuit breaker is a mechanism that's intended to decelerate a market decline. And it's based off of the S&P500 index. If the S&P500 index declines by 7% from the prior day's close, markets pause for 15 minutes. And the thinking is that in those 15 minutes, cooler heads will prevail. And if there was a temporary liquidity deficiency, or if there was startling news that was scaring the market and causing some sort of irrational selling, after those 15 minutes buyers would return to the market and we would have more orderly activity. If however, the market was continuing to sell off and it reached a 13% decline, there would be another 15 minute pause. And then finally, the sort of backstop for a single day of trading is if there's a 20% decline in the S&P500, then trading for the rest of the day is suspended.

Michael Blaugrund:

All of the circuit breakers that we've encountered over the past nine days have been level one. We've not yet, and hopefully we will not, hit a level two or level three criteria. But it was very extraordinary standing on the floor of the New York Stock Exchange last Monday morning. And you could feel the energy on that floor. Everyone knew it was going to be an ugly open, and we knew there was a chance that it was going to trigger that 7% threshold. But when it actually did, when all of those symbols on the screen went from red and green to yellow, and there was a single ring of the stock exchange bell, I think all of our hearts sank.

Michael Blaugrund:

And then we immediately had to go into operational mode, make sure that we were ready to reopen, make sure that the DMMs knew what they needed to do. The floor brokers were communicating to their clients, members across the Street on what to do. And because this is something that we had prepared for and tested across the industry many times, it was a textbook reopening. Prices rebounded. The S&P rose. And while we didn't recover all of that 7% decline for the day, the market ended off of those lows.

Josh King:

Now, a market wide circuit breaker is like, I think you've said it, as pulling the ebrake on a car doing 90 miles an hour on the freeway. But there's several less abrupt methods in place to dampen volatility for individual stocks. What are the protections that they have and how do they work?

Michael Blaugrund:

There are really two major stock specific mechanisms that exist. One is called limit up, limit down. And that is a policy that creates a trading band around every security, either 5% or 10% wide. And it's continuously recalculated based on the prior five minutes of trading. But it ensures that you couldn't have a trade, sort of an aberrant trade that due to a pocket of ill liquidity would be outside of those bands.

Michael Blaugrund:

If someone wants to sort of buy at the upper band or sell at the lower band and it doesn't execute and sort of gets pegged at that restricted level, after 15 seconds the stock goes into a five-minute halt after which it reopens and trading can resume in a more orderly fashion.

Michael Blaugrund:

And the second mechanism is something called the short sale restriction ... stuff declines by 10% in a single day, short sales are no longer permitted at the bid, and that restriction exists for the rest of that trading day, as well as the following day. Those limit up, limit down and short sale restrictions occur every day. That's a sort of typical mechanism that's invoked due to the sort of idiosyncratic behavior of an individual stock. For the entire S&P500 index to fall 7%, that's a much more significant risk off moment for the economy.

Josh King:

So when the market wide circuit breakers hit, those of us who were watching on CNBC, that showed this crowd of brokers hardly buzzing around the floor going from designated market maker to designated market maker. So how much trading is conducted on the floor during a normal day, and how much does it change in an abnormal day like we've seen over the past few weeks as you've been taking stock of the reports that you get after the close?

Michael Blaugrund:

So as you know, Josh, NYSE listed securities trade on about a dozen different exchanges and on several dozen dark pools. But the opening and the closing auctions are a moment where buyers and sellers return to a single concentrated, often in our case, sort of face-to-face marketplace. And the benefit of having one concentrated pool of buyers and sellers is that you get the most robust price discovery and size discovery. If you can learn that there's more to do because you're face-to-face with a buyer and you're a seller, you create a liquidity event and that's the sort of thing you can only do in a centralized market.

Michael Blaugrund:

So even though there are many alternatives to coming to the New York Stock Exchange for our auction, it's the preeminent and most significant liquidity event in the world. And in times of uncertainty, people return to the New York Stock Exchange. And so whether it's a closing auction on the day of an index rebalance, whether it's the closing auction on the day of the Brexit vote, or whether it's some other sort of major event like a market wide circuit breaker, people turned here.

Michael Blaugrund:

And so those floor brokers that you saw buzzing around the floor were receiving feverish goals from their clients, asking what was going to happen. And the exchange with the floor community reminded those investors how the process worked, collected their interest, brought it into the reopening process. And while the market wide circuit breaker only requires a 15-minute halt, the New York Stock Exchange has the ability with the human to open stocks at the right price, even if it takes a little more time.

Michael Blaugrund:

So instead of slavishly responding to the end of a 15-minute timer, if an institution is still gathering its dry powder to come back into the market, we can wait until that arrives to open at a more stable price. And so it was a moment where the DMMs and the floor brokers and other members who were participating electronically were for the first time responding to a reopening auction in every security simultaneously, but it was done in an orderly fashion. And I think we all were very proud that even though it was a tough day to own stocks, everyone who did, was able to have confidence that the market apparatus performed appropriately.

Josh King:

So this Michael is quality over speed and the value of the face-to-face with the buyer and the seller during those market-wide circuit breakers. But as we've said, starting Monday, those traders are not going to be able to operate from the trading floor. Why was the decision made to close the trading floor?

Michael Blaugrund:

It was a very hard decision to make in some respects. We do believe that the market quality that investors and issuers enjoy from that human interaction is unparalleled. But when you consider the kind of speed with which new developments were coming to light with respect to COVID-19 and city, state, and federal responses, the uncertainty of having a potential closure hanging over the market seemed problematic. And the risk that there could be a sort of unplanned, rapid need to move to a purely electronic, had the potential to be disorderly.

Michael Blaugrund:

And so, even though the people in the building wanted to stay, we made the tough decision to close the market floor temporarily, keep the market running continuously electronically, and give the Street several days plus a weekend test to ensure they're ready for the transition so it could be done in a planned, controlled manner.

Josh King:

Is there any precedent to opening the markets without the steady hand of the trading floor community?

Michael Blaugrund:

It's important I think for people to know that even though the human beings are not going to be on the floor, the designated market makers who have accountability to each of our issuers and who have a regulatory obligation to provide continuous displayed bids and offers to the market, as well as additional liquidity throughout the book, to ensure that volatility is dampened, they continue to have that same responsibility in a fully electronic fashion. Those DMMs currently operate in a blended electronic and human fashion.

Michael Blaugrund:

So their responsibilities for continuous trading remain the same. They continue to have the opportunity to open and close stocks. But unlike when we have the floor open, the human DMM is not going to have an opportunity to step in with manual interest if the algorithm is unable to open the stock due to any number of circumstances. And so we operate fully electronic markets on our equities and option ... excuse me, on our equities platforms. Obviously, ICE has experience with fully electronic marketplaces, so it's not new for us. So I don't want to say it's unprecedented for this to happen. But for the New York Stock Exchange, up until the past several years, if the floor wasn't open or unavailable, then it would've been very challenging for the Street to effortlessly transition to our BCP plan.

Michael Blaugrund:

What we've been able to do since Intercontinental Exchange purchased NYSE is bring some of those best practices into this franchise. So now we have a very robust, low-friction business continuity plan that allows our members to largely do on Monday what they do today, but it does lose some of the richness and optionality and color that the human face-to-face interaction brings to the marketplace.

Josh King:

How do you go through testing to get ready for something like this?

Michael Blaugrund:

We, as a practical matter, are always ready any day for a potential disaster. We regularly test on weekends, both with the Exchange alone, as well as with the industry broadly for disaster recovery scenarios that range from the 11 Wall Street building being unavailable or our data center in New Jersey being unavailable, or some combination of sort of doomsday scenarios.

Michael Blaugrund:

So in terms of our readiness, as we moved to our NYSE Pillar technology platform had as requirements from day one that we would be able to manage any sort of disruption to the 11 Wall Street facility. We have ops people located in multiple cities. They can take the reins if they need to. We have the ability to invoke our Exchange, facilitate auctions if the DMMs were to become unavailable. And so while none of us contemplated a global pandemic being the cause for us to have to move to a fully electronic configuration temporarily, the work we had done to prepare for these types of problems generally made it feasible that we could decide on a Wednesday and be ready by Monday.

Josh King:

We had a call today among so many other preparatory calls that you and members of the team have been involved in with what we call our listed company advisory board. These are the CEOs and CFOs of some of the top listed names of the New York Stock Exchange, and both you and Stacy and John Tuttle and Chris Taylor and Hope Jarkowski walked through a lot of the dynamics involved in what was going to happen on Monday. From where they sit, how will the change affect them and also investors? What will they see differently on Monday?

Michael Blaugrund:

If you're a listed company, your expectations should be that the DMM is going to continue to support your trading and you're going to continue to have superior liquidity because of that accountability. If you are a trading professional, there are a couple of differences that you need to be ready for. The floor broker community handles about a third of our closing auction order flow. And in the fully electronic mode, those order types and their access to the point-of-sale obviously cannot occur. And so trading professionals need to use some alternate order types. And these are mechanisms that the Street is very familiar with, but there is some preparation that they need, which is one reason that we decided to make the decision on a Wednesday and give people a few days to prepare.

Michael Blaugrund:

But if you're sitting at home watching CNBC, if they pan to the New York Stock Exchange floor, you're not going to see people. But my expectation is that the New York Stock Exchange is going to remain the principle price discovery venue for those stocks and will remain the most significant risk transfer venue for those stocks. My hope is that, even though our model is at its most robust and full throated and excellent with the human interaction, even diminished we're going to provide a superior product.

Josh King:

Diminished in the absence of one thing for the floor community. The biggest impact of the trading on the floor is likely on the brokers, as you just mentioned, and their ability to conduct this specific order type called a D-Quote. What is a D-Quote and how is it unique to the physical trading floor?

Michael Blaugrund:

So we actually now call them D-Orders.

Josh King:

I'll stick with the classic D-Quote.

Michael Blaugrund:

But the D-Quote is definitely ... I still call it the tap and Z and not the Cuomo bridge, but yeah. So a D-Order is a specialized order type that basically replicates what a trader used to be able to do in the crowd, which is participate kind of at the current market level, but have the ability as you go into the auction to use discretion to operate at a more aggressive price. So if you're buying at a higher price, if you're selling at a lower price. And that interest would get collected at the point-of-sale by at the time the specialist, and you would be assured of an execution in the closing auction.

Michael Blaugrund:

Now, because overwhelmingly interest is submitted electronically, the D-Order allows floor brokers to have that same level of discretion. D stands for discretion, but it's done in an automated fashion. Our systems move those prices instead of humans yelling.

Michael Blaugrund:

What that means is that an investor can either offset an imbalance in supply and demand. They could look to shield their interest, to prevent information leakage, and move into the closing auction late or later in the trading day versus more traditional order types. And because of that flexibility, because of the sort of unique value that the human broker brings to bear with that discretion, it's become a growing tool, a growing proportion of the closing auction in the tool that more people are using.

Michael Blaugrund:

So ensuring that the Street is ready to operate without that in their toolkit is something that our team has been working on for years with the introduction of our BCP plans, but really with urgency over the past several weeks in case this type of transition had to come to pass.

Josh King:

Well, this transition has come to pass. And after the break, Michael and I will discuss how the exchange is working with its trading community, listed companies, and the US government to prepare for what lies ahead. We'll be right back right after this.

Speaker 3:

And now a word from Leslie Stretch, CEO of Medallia, NYSE ticker, MDLA.

Leslie Stretch:

Medallia is a company that applies machine learning to customer experience. Our customers understand their customers in live time and change their experience for the better.

Leslie Stretch:

Deep technology, deep machine learning, the category leaders in all the major industries. And we operate our environment at scale. We have the most eminent minds in machine learning and customer experience in the world. It's all about the people. Medallia is listed on the NYSE.

Josh King:

Welcome back. Before the break, Michael Blaugrund, the Chief Operating Officer of the New York Stock Exchange Group and I were discussing the unprecedented decision to close the trading floor of the Exchange. Mike, you oversee all the exchanges that operate under the New York Stock Exchange Group. How are the other exchanges being impacted by COVID-19 and related market volatility?

Michael Blaugrund:

Broadly, our systems are experiencing order flow and market data traffic that is several multiples of what you would typically see on a busy trading day. The amount of strain that systems across the Street have had to bear is really remarkable. Blissfully, we've migrated all of our equity platforms to the NYSE Pillar technology. And I always hesitate to say anything that might jinx me, but it's been really refreshing to see how well our systems have performed under that load. We've heard from many clients that NYSE, having once been viewed as a technology laggard, is now a leader and the determinism of our system performance-

Josh King:

Now explain. I'm going to interrupt you because you and Stacy always talk about determinism. So for our listeners who are not familiar, what do you mean by that?

Michael Blaugrund:

Determinism in this context refers to how dependably the system responds to an order being received and acknowledged. So you might have a very fast system, but if one out of 10 times it operates slowly, then it's not a very useful system. What the trading community cares about is risk management. And so ensuring that you have a dependable, stable, consistent platform is really important to everyone who operates at scale in our industry. And that phrase, that sort of mindset is often kind of expressed through the word determinism.

Michael Blaugrund:

We've been really pleased that we've been able to improve the sort of top end performance of our systems, but what really thrills us is that even under these extraordinary conditions, if you look at the 99.999 percentile message that we're receiving, it's not much different in terms of its processing than our median or our men. And that's something which people in the financial industry care deeply about.

Josh King:

So let's drill into the numbers a little bit to the extent that you recall them. So volatility begets volume. What is a normal order flow that you're used to seeing and how has it compared over the last few weeks?

Michael Blaugrund:

I don't have the specific numbers in front of me, but from memory, I think, we typically see something on the order of let's call it 300 million orders a day. On recent days we're well over a billion. If you look at the options markets where messaging traffic's much, much more significant than the cash equities world, going into to 2020 the most active day ever saw the options market data tape, it's called OPRA, it saw OPRA process about 45 billion messages. Just two months later, we're at over a hundred billion messages.

Michael Blaugrund:

So it's really been shocking. Really, it's been shocking. People are across the Street desperately trying to increase the capacity for their systems. We've seen one of our competitors on sort of a daily basis sending out emails saying, "Sorry, we've run out of numbers for our market data messaging today." And, I'm not trying to knock them. It's like we are encountering conditions that people just did not anticipate. And of course, everyone's going to go back and retool and reconsider, but it's really just an illustration of the fact that these are extraordinary times and the rate with which we went from, what was normal to our new normal is staggering.

Josh King:

Underlying the volume and what you've been talking about the messaging on OPRA, have there been any issues with the Pillar technology processing with all this uptick in activity? This is a project that you and the team of the New York Stock Exchange have been working on for several years to get ready to go. And it was really just sort of ... the bow was put on it last year.

Michael Blaugrund:

No, it's been a tremendous amount of work to get to this point, but it's extremely gratifying that the NYSE Pillar rollout on the New York Stock Exchange was flawless. And again, knock on wood, the system has performed exceptionally well over this period, but also since its adoption in the summer.

Michael Blaugrund:

So I'm pleased to be able to say that the Pillar platform has operated perfectly. We wish that we were further along with its rot across the entire spectrum of our markets. The options markets will move to Pillar in the coming years. The consolidated tape is moving to Pillar mid-year this year. And we're hopeful that the OPRA options feed will move to Pillar as well.

Michael Blaugrund:

There's a lot of work to do to kind of expand that resiliency and performance across our portfolio. But again, it's been very gratifying that it's operated so smoothly in the cash markets under these conditions.

Josh King:

These conditions. Under these conditions, Michael, several cities across the United States have issued a shelter-in-place restriction on their citizens as we've seen far more extreme quarantining solutions being used in places like Italy and China. How would such an order-in-place in New York City or nationwide affect the markets and finance in general?

Michael Blaugrund:

I think the markets from a operational perspective, in the wake of Hurricane Sandy and just the advances we've seen in telecommuting and work from home and sort of modern group messaging, I think systems will be okay. I think that what is more difficult to predict and more important frankly, is the uncertainty of the times and the uncertainty of the policy response and the sort of global interconnectedness with which this all operates is causing concern. And the market doesn't like surprises.

Michael Blaugrund:

So if we're in kind of extraordinary postures while we're dealing with extraordinary market conditions for an extraordinary long period of time, it's going to be difficult for everyone across the Street to continue pitching the perfect game.

Josh King:

Yeah.

Michael Blaugrund:

And if some piece of critical infrastructure starts to wobble, it's going to be that much harder to restore it because we all find ourselves unable to get within six feet of each other.

Michael Blaugrund:

So our team has handled the move to either kind of A and B group segregation or overall work-from-home status with grace. But none of us know when this period is going to end. And at some point one link in our chain is going to break. And when it does, I don't believe it'll be an NYSE system. I do worry that our ability as a financial market system to respond is going to be impaired because we find ourselves in this posture.

Josh King:

There've been some calls from government and the private sector for all markets to shut down, along with the many other industries that are being paused. NYSE President Stacy Cunningham's been a vocal advocate for not shutting the market. Why is that? And do you think that a full market shutdown is possible?

Michael Blaugrund:

Shutting down the market is not on the table. And everything we've heard from policy makers and regulators affirms that that is not on the table. And I'm very pleased that that's the case, because the last thing that we should do is suggest to people that they may not be able to access their money. Particularly at a time when their jobs or their restaurant or their bar might be bringing in no revenue, people need to be able to access their savings. And when you talk about shutting down the market, what you're really saying is you can't get your savings. And so nothing would inspire in my view panic selling like a threat of the market being closed.

Michael Blaugrund:

If the market's not operating, that doesn't mean that asset values are remaining flat. It just means that there's no visible price discovery and there's no liquidity. We've seen developing markets several years ago, China is an example, where the government interceded and just said, "We're going to stop trading these names for a while." And the results were calamitous. So I'm pleased that US market participants are united that any sort of extraordinary intervention like shutting the markets would be folly.

Josh King:

And then taking one step short of that, the suggestion that has been around the last couple days of perhaps shortening the hours of the trading day. What would be the implications of that?

Michael Blaugrund:

Again, I don't think there's any credible discussion of shortening the trading day. There was a sort of offhand comment made by the Treasury Secretary, and I think what he was probably trying to intimate is that if there were ...

Josh King:

Who's an advocate of shortening the trading day? What would it possibly accomplish?

Michael Blaugrund:

The only thing I can think of is that there are some businesses including clearing for active new market participants where the volume of activity either because of the risk that the scale that activity represents, or just because of the sheer number of transactions that need to be processed, but the volume of activity becomes problematic for that market participant.

Michael Blaugrund:

And so it may well be the case that there are some market participants that would like to see fewer transactions, even if the prices were the same and even if the total value of those transactions were the same. They might like to actually just see less trading occurring. That's the only angle I can think of. But what's really important is that everyone understands the rules of the game. And there are no surprise changes while we're in the middle of the game of how it should be played.

Michael Blaugrund:

And finance is exceptionally interconnected now across asset classes and across regions. And again, even a sort of modest adjustment that seems well-intentioned in one area could have knock-on effects elsewhere, whether it's index calculation or derivatives being priced off of something in a new fashion or risk then being unhedged. So any sort of change that's made needs to be very thoughtfully done, very carefully reviewed and communicated and socialized.

Michael Blaugrund:

So I think it's very heartening that everyone seems to be singing from the same song sheet here. We need to keep the markets open and we need to play by the rules that we all understand.

Josh King:

The SEC's our main regulator. What are the conversations you've been having with them?

Michael Blaugrund:

It's funny how we all go from being fierce competitors to being cooperative. Our regulator is very assertive and it's encouraging that when we're in these times of market stress, not that they become less assertive, but we all become interested in focusing on the same problems.

Michael Blaugrund:

So we're focused on market stability. We're focused on soundness. We're focused on risk controls. And as we move into the fully electronic configuration next week, we're focused on communication and making sure that everybody in the ecosystem understands how things will work, making sure we double check and double test everything that's been put in place, and whether it's a rival exchange or a broker dealer that might be trying to internalize order flow away from the Exchange or our regulator, we all have an interest in ensuring that investor confidence remains high and that the system operates well. We'll be back at each other's throats soon enough, but right now we're all cooperating.

Josh King:

But the SEC, they've been cooperative and helpful in some of the changes that have been put in place to ease the burden of our high listing standards. What's happened there?

Michael Blaugrund:

Well, we do have the highest listing standards in the US equity markets. Some of our companies, given the rapid descent in stock prices, have found themselves in some cases unexpectedly below what we call sort of our below compliance, beneath our continued listing standards. And so we've been able to make some targeted adjustments there.

Michael Blaugrund:

Our listing standards remain extremely high, but in some cases sort of on a technicality, some of these companies who've had their stock prices decline precipitously would've fell afoul of them. And so the SEC's been helpful in trying to remedy some of those kind of unexpected outcomes.

Michael Blaugrund:

I think they've also been very helpful to listed companies and trying to provide guidance and some relief with respect to their own reporting obligations as they're dealing with the novel challenge of coronavirus. It's been a very strong performance by the SEC and Chairman Clayton and Director Redfearn and Director Hinman over the past several weeks.

Josh King:

So Michael, as we wrap up, this podcast is being recorded as we head into the weekend. What, if anything, will need to happen over the weekend to prepare for 9:30 AM in the morning?

Michael Blaugrund:

Our systems are ready. There's nothing new that the New York Stock Exchange needs to do. We're going to hold an industry test Saturday morning with the alternate configuration enabled so that all of our members have the opportunity to test one more time before we go into Monday morning. Really, the biggest open question that I think we're dealing with right now is who rings the bell. Who rings the bell on Monday morning, when that floor's empty? That's going to be a sublime experience.

Josh King:

So as we get into that Monday morning, I don't want to be a Monday morning quarterback. I want to be a Thursday night quarterback before it even happens. How's it going to go and what should we be looking for to know that the opening has gone as successful as possible?

Michael Blaugrund:

Just like every other Monday at 9:30 DMMs are going to electronically open most of our securities. What's different is that shortly after 9:30, the exchange staff will invoke an exchange facilitated auction for those names that are not yet open, and DMMs will, along with all of our other market participants, enter their bids and offers, and the more market will be open.

Michael Blaugrund:

So investors, members, listed companies, and regulators should expect that on Monday morning, other than it being quiet and missing some of the richness of the human interaction on the floor, NYSE is still open for business.

Josh King:

NYSE, still open for business. That is basically the fundamental message of our emergency podcast here recorded late on a Thursday night, going into Friday and the weekend. Michael Blaugrund, Chief Operating Officer of the New York Stock Exchange, thanks so much for letting us into your home tonight, as we put a period on this extraordinary week.

Michael Blaugrund:

My pleasure. You owe me a cocktail in the Library.

Josh King:

Thanks buddy. That's our conversation for this week. Our guest was Michael Blaugrund, Chief Operating Officer for the New York Stock Exchange Group.

Josh King:

If you liked what you heard, please rate us on iTunes so other folks know where to find us. And if you've got a comment or question, you'd like one of our experts to tackle on a future show as we did here tonight, email us at [email protected] or tweet us @icehousepodcast. Our show is produced by Pete Ash with production assistance from Stefan Rumancik and right here with me in the New York Stock Exchange, Ian Wolf. I'm Josh King, your host, signing off from a very quiet Library of the New York Stock Exchange. Thanks for listening. Stay socially distanced and wash your hands, and we'll talk to you next week.

Speaker 1:

The information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE, nor its affiliates make any representations or warranties, expressed or implied as to the accuracy or completeness of the information and do not sponsor, approve, or endorse any of the content herein. All of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security, or a recommendation of any security or trading practice. Some portions of the preceding conversation may have been edited for the purpose of length or clarity.

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Information contained in this podcast was obtained in part from publicly available sources, and not independently verified. Neither ICE nor its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of the information and do not sponsor, approve, or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security, or a recommendation of any security or trading practice.