NYSE's Post-Sandy Reopening Potentially Volatile

The streets surrounding the New York Stock Exchange are deserted as financial markets remain closed for the second day due to
The streets surrounding the New York Stock Exchange are deserted as financial markets remain closed for the second day due to superstorm Sandy, Tuesday, Oct. 30, 2012. Sandy, the storm that made landfall Monday, caused multiple fatalities, halted mass transit and cut power to more than 6 million homes and businesses. (AP Photo/Richard Drew)

If and when U.S. stock trading starts up again on Wednesday, the crowd waiting to trade will be like those Black Friday masses busting down the doors of Wal-Mart to get their hands on a $20 DVD player. Things could get ugly.

Everything could go smoothly, of course. But investors should be ready for the chance, however small, of volatile trading that could further rattle already shaky confidence in financial markets, with longer-term implications for the economy, and possibly the presidential election, if things get really messy.

"The last thing we can afford in this country is for capital markets to come online tomorrow and not have the ability to handle what happens, after 48 hours of being closed after a natural disaster," said Dennis Kelleher, president and CEO of Better Markets, a financial-reform advocacy group. "It will compound all the bad trends in these markets."

The New York Stock Exchange (NYSE) and Nasdaq plan to reopen stock trading on Wednesday, after closing for two days due to megastorm Sandy -- the first two-day weather-related shutdown since 1888. The direct economic impact of the trading halt was probably near zero, aside from some lost trading revenue for banks, given its short duration and the fact that other markets stayed open around the world.

The shutdown didn't exactly inspire confidence, however, in the ability of financial markets to handle the reopening. Some observers have wondered why the NYSE wasn't prepared for an eventuality like Sandy. And a sloppy reopening could only make a bad situation worse.

The timing couldn't be much less ideal. Stocks will be opening on the last day of the month, a period when mutual funds and other money managers typically shuffle their portfolios to try to hit performance targets. The reopening will come just days before the all-important October jobs report, due on Friday or later, depending on whether the Labor Department decides the report can be ready. And it will come less than a week before an election to determine the next president and the makeup of the next Congress.

On top of all that, a volatile market could also be fertile ground for high-speed trading robots looking to take advantage of discrepancies in prices to turn a quick profit, warned Kelleher.

"While everybody else is worrying about what happens with the disaster, I'm concerned you also have high-frequency-trading programmers figuring out how to take advantage of what will be a bunch of market anomalies whenever it comes back on line," Kelleher said.

Stir in the possibility that the exchanges may not be fully up to speed -- the NYSE has said it might go to all-electronic trading if necessary -- and the fact that many traders may still be offline due to the storm, and you have the recipe for potential market chaos.

"The level of uncertainty that is created in the environment where there has been some level of disaster or catastrophe -- that often creates volatility," said Robert Iati, partner and head of global consulting at TABB Group, a market research firm.

The NYSE did not respond to a request for comment. Clearly, it has to get back to trading, sooner rather than later. For now, the economic impact of a couple days' shutdown is "practically nothing," said Tony Chernin, a finance professor at San Diego State University. A prolonged delay might affect confidence, and economic activity, more than a day or two of volatile trading.

Under the circumstances, it's not unreasonable to be on the lookout for something more than volatile trading. There's a small risk of something more like the Flash Crash of 2010, or the Facebook IPO debacle, or the Knight Capital trading disaster, to name just a few -- episodes that have crushed investor confidence in U.S. capital markets, according to a recent TABB Group study. Retail investors have been pulling money out of stock mutual funds and pouring it into bond funds, even as the stock market has nearly doubled since 2009 and bond prices are near record highs. Investors' lack of confidence is "causing them to make bad decisions," Chernin writes.

Another such episode six days before the election would hardly be welcome news for President Obama. For the economy, it would further weaken faith in capital markets, ultimately making it harder for companies to raise money in the U.S.

"The funding of American businesses, real businesses that create real jobs, not paper shufflers on Wall Street, depends on deep, fair capital markets, and access to them," said Kelleher, the president and CEO of Better Markets. "And when that goes away, the fuel that enables business in this country goes away also."